NVIDIA (NASDAQ:NVDA)
Those who don’t study the past are destined to repeat its mistakes. Graphics card manufacturer NVIDIA (NASDAQ:NVDA) is no stranger to surging demand from bitcoin miners. Similar to how bursting cryptocurrency bubbles will inevitably cause a decline in demand, this is not a hypothetical scenario.
NVIDIA’s (NASDAQ:NVDA) second-quarter results were about as awful as was anticipated. Earlier this month, the firm warned it would fall significantly short of its previous projection due to declining demand for gaming graphics cards. Overstocking at channel partners caused a significant halt in purchases. NVIDIA (NASDAQ:NVDA) saw a 44% drop in gaming revenue compared to the prior quarter.
The decline in gaming demand was due to several variables, but the biggest may be the fall in bitcoin values. Once the return on investment for miners disappears as prices decline, so makes a demand for NVIDIA’s products, as they are utilized to perform the numerical crunching necessary to mine multiple cryptocurrencies.
Terribly predictable
Anyone who has been keeping up with NVIDIA (NASDAQ:NVDA) for more than a year or two will not be surprised by the precipitous drop in gaming revenue. The same scenario occurred again as NVIDIA’s fiscal year closed in 2019. Graphics card demand had skyrocketed as cryptocurrency miners capitalized on inflated pricing, but this trend abruptly reversed after the cryptocurrency market crashed.
Like the current quarter, NVIDIA’s gaming revenue dropped 46% from the previous quarter. NVIDIA’s gaming income did not fully return until the beginning of the ubiquity boom.
NVIDIA’s (NASDAQ:NVDA) predicament is that it is unclear to the company how closely bitcoin is linked to the market for video games. The demand picture is complicated because cryptocurrency miners purchase graphics cards through the same channels as gamers. Yet, given the zeal surrounding cryptocurrencies during the epidemic, “a lot” is a plausible assumption this time around.
Surprisingly, NVIDIA (NASDAQ:NVDA) was caught off guard by the sharp reduction in demand for graphics cards, given that the cryptocurrency markets began to disintegrate early this year. Nevertheless, it turned out that way. Again. NVIDIA (NASDAQ:NVDA) allowed channel inventories to grow to unmanageable levels. The firm is offering markdowns to unload stock and has recorded costs of $1.34 billion due to outstanding purchases and inventory.
Since a crypto fall is not the sole contributing element, the current crisis could be considerably more severe. The PC industry is in disarray, and the demand from cryptocurrency miners hasn’t helped. The worldwide loss in PC shipments in the second quarter was the steepest annual drop in nine years, at -12.6%. Intel and Micron aren’t the only chipmakers experiencing demand issues. The current problem results from several interrelated factors, including economic instability, sky-high prices, conflict in Europe, lockdowns in China, and the anticipation of some demand brought by the pandemic.
A glimmer of hope
The fact that NVIDIA’s data center division is thriving is good news. Demand from cloud computing customers kept data center revenue stable in the second quarter, and it even increased slightly from the first quarter. NVIDIA’s data center division has grown significantly since the last time the business experienced a decline in gaming sales. As NVIDIA (NASDAQ:NVDA) strives to reduce channel inventory, this will help mitigate some effects.
However, whether or not this robust demand for data centers will continue is an open topic. NVIDIA (NASDAQ:NVDA) claims that there is now a lack of GPUs on cloud computing platforms, but as we have seen in the gaming industry, this situation may change rapidly. NVIDIA’s data center products might see a decline in demand if cloud computing service demand slows.
The second quarter for NVIDIA (NASDAQ:NVDA) was a complete bust, and the company’s projections for the third quarter only look to make things worse. The company predicts a sequential fall in sales of 12%, with the decline in gaming revenue being more than offset by the increase in data center revenue. If demand for gaming graphics cards continues to decline, it could be longer before the stockpile is depleted.
You can anticipate decreased sales and significantly lower profits from NVIDIA (NASDAQ:NVDA) until supply and demand rebalance.
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Author Shariq Khan 