One Big Reason Nvidia’s Second Quarter Earnings Disappointed Investors

semiconductor company NVIDIA (NVDA -2.08%) Over the past five years, we’ve benefited greatly from building products that enable nearly every major multi-year trend in the tech industry. As a result, the remarkable revenue growth of the last few years seemed unstoppable at some point. However, its recently reported quarter of fiscal year 2023, which ended in June, proved to be a major disappointment for investors.

Here’s one of the big reasons Nvidia’s second quarter earnings results have blown investors away.

Gaming revenue growth hits a wall

Nvidia’s total revenue for the second quarter of fiscal 2023 was $6.7 billion, down 19% quarter-on-quarter and up just 3% year-over-year. The figure is well below his $8.1 billion forecast provided by management on its first-quarter fiscal 2023 earnings call. So what caused this slowdown in growth?

Gaming revenue made up a significant portion of total revenue, down 44% quarter-on-quarter and 33% year-over-year. Management had expected a slowdown in the game due to the war in Ukraine, his COVID-19 lockdown in China, and weak European demand related to the slowing US economy, but the fallout has led to this. I didn’t expect it to be as dramatic.

The company likes to dance around this topic, but an unknown but significant amount of cryptocurrency sales is included in its gaming segment. The sales channels that Nvidia uses for its gaming customers are the same channels that cryptocurrency miners use to purchase their products. As such, management claims they never knew the extent of cryptocurrency sales. Still, they seem to be very skeptical about how much demand there really is for cryptocurrencies. Some people have previously accused the company of hiding from investors. for example, The U.S. Securities and Exchange Commission sued Nvidia in May 2022 for downplaying the impact of cryptocurrency mining on its 2018 earnings, which it recently settled.

A nasty cryptocurrency hangover

Crypto miners have found that graphics processing units (GPUs) are faster than central processing units (CPUs) for computing math problems related to mining. This is the main reason why the cryptominer has increased demand for his Nvidia gaming GPU.

The sale of these GPUs to cryptocurrency miners has made a huge profit for Nvidia in 2021. During last year’s crypto industry bull market, every crypto mining farm in the world bought Nvidia’s GPUs in bulk. Demand for GPUs became so high that it exceeded Nvidia’s market supply capacity, creating a GPU shortage. Additionally, at some point it became difficult for true gamers to buy new graphics cards.Company To meet the demand of this “game”, we have significantly increased the production of GPUs. The artificial boost to gaming from the demand for cryptocurrency mining has allowed the company to revel in rapid revenue growth.

NVDA Earnings (TTM) chart.

NVDA Revenue (TTM) data by YCharts.

Unfortunately for the GPU maker, the cryptocurrency market appears to have been adversely affected by the Federal Reserve’s interest rate hike. His 2022 GPU demand forecast by Nvidia did not materialize as crypto miner GPU demand plummeted as the crypto industry experienced a bear market. As a result, the good times have now turned into hangovers. Company.

Nvidia wants to quickly sell its $1.32 billion inventory at discounted prices before it releases its next-generation ‘Lovelace’ gaming GPUs. Sadly for his current Nvidia investors, it may be a while before this headache goes away. If you invest in this stock, you should not expect a quick recovery in results.

the game finally recovers

Fortunately for investors, cryptocurrencies are not part of Nvidia’s long-term investment themes. Although cryptocurrencies have been profitable in the past, the cryptocurrency market has a history of being very volatile and this business poses far more problems for the company than profits. We’ve built in countermeasures into the GPU that reduce mining efficiency. The company seems to want to minimize the impact of cryptocurrencies on its business.

Management believes in the gaming business excluding crypto in the long term. Chief Financial Officer Colette Kress said in her Q2 2023 earnings call that while gaming has weathered significant near-term macroeconomic challenges, gaming’s long-term fundamentals remain strong. said he was thinking. In addition to gaming, Nvidia has several long-term growth drivers in a variety of areas, including data centers, automotive, and vision systems that enable the metaverse.

So if you’re a long-term investor looking for solid growth stocks and can wait for short-term headwinds to their performance, this could be a great time to pick up some stocks.

Rob Starks Jr. has no positions in any of the stocks mentioned. The Motley Fool has a position with and recommends Nvidia. The Motley Fool’s U.S. headquarters has a disclosure policy.

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