Those who do not learn from history are doomed to repeat it. The surge in demand for graphics cards by cryptocurrency miners is nothing new. NVIDIA (NVDA -1.76%)The cryptocurrency bubble will not burst and demand will inevitably plummet.
NVIDIA’s second quarter results were almost as bad as expected. Earlier this month, the company warned that demand for gaming graphics cards was weakening, leading to far below its previous guidance. Inventory levels at channel partners were bloated, leading to a significant slowdown in purchases. NVIDIA’s gaming revenue fell 44% from the previous quarter.
The decline in gaming demand was due to multiple factors, but the collapse of cryptocurrency prices may be the biggest factor. NVIDIA graphics cards are used to perform the number of calculations required to mine various cryptocurrencies. Lower prices reduce the miner’s return on investment and reduce demand for NVIDIA products.
NVIDIA’s gaming revenue collapse shouldn’t come as a surprise to anyone who’s followed the company for at least a few years. The exact same thing happened to him towards the end of his 2019 fiscal year for NVIDIA. Demand for graphics cards surged as cryptocurrency miners took advantage of very high prices, but all that demand disappeared when the bubble burst.
NVIDIA’s gaming revenue fell 46% in Q4 2019 compared to the previous quarter, and declined at about the same rate this quarter. It took until the pandemic boom started for NVIDIA’s gaming revenue to fully recover.
The problem NVIDIA faces is that we don’t really know how much gaming demand is actually related to cryptocurrencies. Cryptocurrency miners buy graphics cards through the same channel as gamers, disrupting the demand landscape. Still, given the intensity of the cryptocurrency craze during the pandemic, a reasonable guess this time around would have been “pretty much.”
The cryptocurrency market began to implode earlier this year, so a drastic drop in demand for graphics cards shouldn’t catch NVIDIA off guard. And yet, it was. Also. NVIDIA has inflated their channel inventory, but now it’s paying the price. The company has taken advantage of discounts to move inventory, costing him $1.34 billion in expenses related to current inventory and purchase obligations.
The cryptocurrency crash isn’t the only factor, so this time it could be much worse than last time. In addition to plummeting demand from cryptocurrency miners, the PC market is in turmoil. His PC shipments worldwide in the second quarter fell 12.6% year-over-year, marking the biggest decline in nine years.other chip companies including intel When micron, is also facing the problem of demand. Economic uncertainty, extremely high inflation, war in Europe, lockdowns in China, and the front-loading of at least some demand during the pandemic have all contributed to the current predicament.
One of the good news for NVIDIA is that its data center business is still going strong. Data center revenues continued to be strong in the second quarter, up slightly from the first quarter as demand from cloud computing customers remained strong. The data center segment is now by far NVIDIA’s largest, and much larger than the last time the company saw its gaming sales drop. This will help mitigate the impact as NVIDIA is working to reduce channel inventory.
The big question, however, is whether data center demand will remain strong. NVIDIA believes demand for GPUs in its cloud computing platform still outstrips supply, but as we’ve seen in the gaming business, a shortage could quickly turn into a glut. If demand for cloud computing services begins to slow, he will ultimately see demand for NVIDIA’s data center products fall.
NVIDIA’s Q2 was a disaster, and its Q3 guidance calls for more pain. The company expects total revenue to decline another 12% quarter-on-quarter as a sharp decline in gaming revenue is partially offset by higher data center revenue. It will take at least a few quarters for the stock situation to be corrected, and possibly longer if demand for gaming graphics cards weakens further.
Expect lower revenues and significantly lower profits from NVIDIA until supply and demand are back in balance.
Timothy Green holds a position at Intel. The Motley Fool invests in and recommends Intel and NVIDIA. The Motley Fool recommends the following options: Intel’s Jan 2023 long call at $57.50 and Intel’s Jan 2023 short put at $57.50. The Motley Fool’s U.S. headquarters has a disclosure policy.