Opinion: Nvidia’s record earnings are a scary sight

The financial results of Nvidia Corp. a bit of a surprise to investors, and not in a good way – product inventories rose to an all-time high as the chip company prepares for a questionable holiday season.

Nvidia reported fiscal third-quarter revenue that was slightly better than analysts’ downbeat expectations on Wednesday, but the numbers weren’t all that impressive. Revenue fell 17% to $5.9 billion, and earnings were cut in half thanks to a $702 million inventory charge, which was mainly related to slower data center demand in China.

Gaming revenue in the quarter fell 51% to $1.57 billion. Nvidia said it is working with its retail partners to help move existing high-channel inventory.

While the company was writing off inventory for China, its own new product inventory was growing. Nvidia NVDA,
-4.54%
reported that total product inventory nearly doubled to $4.45 billion in the fiscal third quarter, compared to $2.23 billion a year ago and $3.89 billion in the previous quarter. Executives cited upcoming product launches, designed around its new Ada and Hopper architectures, when asked about the inventory gains.

In the semiconductor industry, high inventories can make investors nervous, especially after the industry has faced so many supply constraints in recent years that a chip glut in 2022 is on the cards. gaming and the willingness of consumers to spend in the middle of the sky. – the high inflation of this holiday season, if all that product is on hand is increasing the nerves.

Full earnings coverage: Nvidia profit cut in half, but tweaked servers to China offset earlier $400 million warning

Chief Financial Officer Colette Kress told MarketWatch in a phone interview Wednesday that the company’s high level of inventory was in line with its high revenue levels.

“I believe….it’s the highest level of inventory we have,” she said. “They go hand in hand.” Kress said she was confident in the success of Nvidia’s upcoming product launches.

Nvidia’s revenue peaked in the April 2022 quarter with $8.3 billion, and over the past two quarters revenue has slowed, with sluggish gaming demand amid a transition to a new cycle, and a decline in Chinese data center demand due to the COVID-19 lockdown and government restrictions USA.

For its data center customers, the new architectures promise major advances in computing power and artificial intelligence features, and Nvidia plans to ship the equivalent of a supercomputer in a box with its new products over the next year. Those types of advanced products weigh on inventory totals even more, Kress said, because of the price of the whole package.

“It’s because of the complexity of the system that we’re building, that’s what drives the inventory, the pieces of that together,” Kress said.

Bernstein Research analyst Stacy Rasgon believes Hopper-based products will begin shipping in the next few quarters, “at relevantly higher price points.” He said in a recent note that he believes Nvidia’s numbers were likely to bottom out this quarter.

“We remain positive on Hopper’s ramp into next year, and believe that the numbers at this point have probably reached near the bottom, with new cycles brewing and an attractive secular story even without China’s potential,” Rasgon said in a note. Tuesday’s earnings preview.

Also read: Warren Buffett’s chip stock purchase is a classic example of why you should be ‘greedy only when others are afraid’

Nvidia CEO Jensen Huang reminded investors on a conference call that the company’s inventories are “never zero,” and said everyone is excited about the upcoming launches. But it doesn’t take too long to recall a time when Nvidia went into holiday with an inventory backlog that included a new architecture and disappointed investors: Four years ago, Huang had to cut his holiday earnings forecast twice. A “cryptic hangover” that has a similar dynamic to the current moment

Investors need faith that this holiday season won’t be the same, even as demand for some video game products declines after a pandemic boom just as the market for cryptocurrencies — some of which are related to Nvidia – rough patch. Huang said Nvidia’s RTX 4080 and 4090 graphics cards based on the Ada Lovelace architecture had an “excellent launch” and sold out.

​​​​Nvidia shares gained more than 2% in after-hours trading on Wednesday, suggesting some are betting this time will be different. That enthusiasm needs to translate into revenue for Nvidia so that this big gain in inventory doesn’t end up being another write-off at some point in the future.

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