1 Big Reason Why Nvidia’s Second-Quarter Earnings Results Underwhelmed Investors

Semiconductor company Nvidia (NVDA -2.08%) has benefited significantly over the past five years from manufacturing products that enable virtually all major multi-year trends in the technology sector. As a result, its exceptional revenue growth over the past few years seemed unstoppable at one point. However, the recently reported fiscal 2023 quarter ended in June proved to be a major disappointment for investors.

Here’s a big reason why Nvidia’s second quarter earnings results disappointed investors.

The game’s revenue growth has hit a wall

Nvidia’s total second-quarter fiscal 2023 revenue of $ 6.7 billion was down 19% sequentially and just 3% year-on-year. This number was far less than the $ 8.1 billion provided by outlook management in its fiscal first quarter 2023 earnings forecast. So what was the culprit behind this slowdown in growth?

You can indicate game revenue, a significant portion of total revenue, down 44% sequentially and 33% year-over-year. And while management expected a slowdown in games due to weak European demand related to the war in Ukraine, the COVID-19 blockade in China and the slowdown in the US economy, it didn’t expect the decline to be so drastic.

Although the company likes to dance on the subject, an unknown but significant amount of cryptocurrency sales are included in its gaming segment. The sales channels used by Nvidia for its gaming customers are the same channels used by cryptocurrency miners to purchase its products. So management claims they never know the extent of cryptocurrency sales. However, they seem to strongly suspect how much demand for cryptocurrencies there actually is; some people have previously accused the company of hiding from investors. For instance, The Securities and Exchange Commission sued and recently resolved charges against Nvidia in May 2022 for downplaying the impact of cryptocurrency mining on its results in 2018.

A bad cryptocurrency hangover

Cryptocurrency miners find graphics processing units (GPUs) faster than central processing units, or CPUs, to calculate the math problems involved in mining – the main reason for cryptocurrency miners’ high demand for gaming GPUs by Nvidia.

These GPU sales to cryptocurrency miners were a huge boon for Nvidia in 2021. Every cryptocurrency farm around the world bought large amounts of Nvidia’s GPUs during the cryptocurrency market’s bull run last year. The demand for its GPUs has been strong enough to exceed Nvidia’s ability to supply the market, creating a shortage of GPUs. Also, at some point it became difficult for real gamers to buy a new graphics card. The company significantly increased GPU production to meet this demand for “games”. The artificial push to play from cryptocurrency mining demand has made the company intoxicated by the rapid revenue growth.

NVDA revenue chart (TTM).

YCharts NVDA (TTM) revenue data.

Unfortunately for this GPU maker, the cryptocurrency markets appear to be negatively impacted by the Federal Reserve’s hike in interest rates. With cryptocurrency miners’ demand for GPUs declining as the cryptocurrency industry experiences a bear market, Nvidia’s forecasted GPU demand for 2022 has not materialized. As a result, the good times have now turned into a hangover for the agency.

Nvidia is holding $ 1.32 billion in inventory that it wants to quickly sell at a discount before releasing its next-generation “Lovelace” gaming GPUs. Unfortunately for current Nvidia investors, it may take some time for this headache to go away. If you invest in this stock, you shouldn’t expect a quick rebound in results.

The game will eventually recover

Fortunately for investors, cryptocurrency is not part of Nvidia’s long-term investment thesis. Although cryptocurrencies have been profitable in the past, the cryptocurrency market has a history of being so volatile that this business presents the company with far more problems than benefits. Management has integrated the measures into its GPUs to make them less effective for cryptocurrency mining. It seems the company wants to minimize the impact of cryptocurrencies on their business.

Management believes in the business of games, excluding cryptocurrencies, in the long term. Chief Financial Officer Colette Kress said on the second quarter 2023 earnings call that although the game is facing significant short-term macroeconomic challenges, the company believes the long-term fundamentals of the game remain solid. In addition to games, Nvidia has many other solid long-term growth drivers in different areas, such as data centers, automotive, and vision systems that enable the metaverse.

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

Rob Starks Jr has no position in any of the titles mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool has a disclosure policy.

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