Nvidia company
NVIDIA COR
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managed to surprise the market for the worse even at a time when expectations are already on the floor. The company published preliminary results for the second quarter that were substantially lower than expected, revenues of 6.7 billion dollars compared to an expectation of 8.1 billion, and also cut the forecasts for the third quarter to revenues of 6.7 billion compared to a previous forecast of revenues of 8.4 billion dollars.
It’s not every day that a company loses about 20% in the revenue line, but the market reacted relatively moderately on the first day after the announcement and the stock fell by only about 6%. Why was the market so gentle with the company after a disappointment of this magnitude? It is possible that the market thinks that all the bad news is already embodied in the price, in any case, it is important to check what caused the sharp decrease in revenues.
The company attributed the drop in revenue to the drop in demand for the graphics cards produced by the company intended for gaming computers, where sales were cut by 44% from last year and amounted to $2.04 billion. There is a general decrease in demand for personal computers around the world attributed to the post-corona period as well as the difficulties of supply chains.
“Our gaming product sales forecast declined significantly during the quarter, and we expect macroeconomic conditions to continue to impact sales, so we have taken steps with our gaming partners to adjust pricing and inventory channels,” said company CEO Jensen Hwang.
However, attributing such a sharp drop in demand to gamers seems a strange thing, which has not been observed in other companies. The analysts attribute the drop to another factor – the drop in demand for crypto mining, especially for the second largest network, Ethereum. The decrease in demand in this area is primarily due to the sharp declines in the price of crypto-currencies that harm the viability of mining, but is also specifically related to the Ethereum network which is progressing towards a fundamental change in the way it functions, which will significantly reduce the requirements for powerful computing power.
The blockchain network, which until now has worked with the older “proof of work” method, as the bitcoin network works, which is a “wasteful” method in terms of energy consumption and requires enormous computing power that grows over time, is expected to undergo a change in the coming weeks to the more advanced method called “proof of stake” ” which requires much less computing power for mining. This change, if it does happen, will mean that there will no longer be a need for Nvidia’s advanced graphics cards, which will cause both a decrease in future demand, and the release of many used graphics cards that were used for this purpose, and are now no longer needed, onto the market.
The company did not specify in its announcement the reasons for the drop in demand, but according to the estimates of analyst Raymond Games, the drop in sales of 44% is similar to the drop in the previous “crypto winter” in 2018.
This does not mean that the gaming sector has no influence on the declines. According to the research company NPD, consumer spending on video games decreased by 13% during the second quarter. High prices in basic consumer goods such as food or fuel harm the ability to spend on luxuries such as gaming, therefore as the consumption power suffers we will continue to see damage to spending on graphics cards for gaming purposes, especially in light of the fact that during the epidemic many players upgraded their computers with new graphics cards, and now are not Need another upgrade.
The question of where the drop in demand stems from is important for understanding the real situation of Nvidia, because if the problem with demand is related to a temporary situation of high inventory and a decrease in demand for gaming, then the recovery of the economy and the return of inventories to balance will soon restore demand later, however, if the main decrease is due to a permanent change in the ethereum network, then this is the “new normal”, and it must be considered the expected sales of the company when taking into account that the decrease in demand in this segment is permanent. Also, around the expected launch of the Ethereum network upgrade at the beginning of September, the stock is expected to react according to the success or failure of the transition.
It should be remembered that Nvidia is active, and growing nicely, in additional segments, so not everything is black in the chip giant. Nvidia’s data centers, automotive chips and software businesses are expected to continue to grow at a good pace and meet strong market demand. Data center sales hit a new high, albeit slightly below expectations, but only because of supply chain difficulties and not because of a drop in demand. Therefore, growth at the successful chip company is expected to continue, but the stability of growth in the coming quarters should be carefully watched.
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