Nvidia has a Pascal problem, and its stock is plunging after earnings

Nvidia Corp. shares plunged in the extended session Thursday after the chipmaker’s earnings and outlook fell short of Wall Street estimates and a cratering in cryptocurrency sales helped build up an excess inventory of older gaming chips.

Nvidia

NVDA, +2.64%

 shares plunged 18% after hours, following a 2.6% rise to close the regular session at $202.39. Nvidia shares had already declined 21.9% in the past three months, as the PHLX Semiconductor Index

SOX, +3.34%

 has declined 7.4% and the S&P 500 index

SPX, +1.06%

 dropped 4.1%.

“Gaming revenue was short of our expectations, and our fourth-quarter outlook is impacted by excess channel inventory of midrange Pascal products,” Nvidia Chief Financial Officer Colette Kress said in a statement. “We believe this is a near-term issue that will be corrected in one to two quarters, and remain confident in our competitive position and market opportunities.”

Gaming revenue rose 13% from a year ago to $1.76 billion, but that was way below the Wall Street consensus of $1.91 billion.

On the call, Kress said that the quarter “included a $57 million charge for prior architecture components and chips following the sharp falloff of crypto mining demand.”

Ever since last year’s peak in cryptocurrencies like bitcoin

BTCUSD, +0.45%

, more and more miners have sold off their mining rigs, meaning there has been a flood of second-hand Pascal gaming chips and gaming chips from companies like Advanced Micro Devices Inc.

AMD, +3.27%

 on the market.

Nvidia explained that it is holding on to too many of its older-generation Pascal chips — Pascal is the chip architecture that is being replaced by Nvidia’s recently released Turing chip architecture for professionals and gamers.

That wreaked havoc with Nvidia’s forecast for the fourth quarter as it seeks to work down that inventory. The company called for revenue of $2.65 billion to $2.75 billion, while analysts on average had expected revenue of $3.4 billion.

For the third quarter, the company reported net income of $1.23 billion, or $1.97 a share, compared with $838 million, or $1.33 a share, in the year-ago period. On a fully adjusted basis, which strips out stock compensation, earnings were $1.84 a share. Analysts on average expected Nvidia to report GAAP earnings of $1.71 a share and adjusted earnings of $1.93 a share.

Revenue rose to $3.18 billion from $2.64 billion in the year-ago quarter. Wall Street expected revenue of $3.24 billion from Nvidia.

Data-center sales rose 58% to $792 million, while the Street expected $819 million. Professional visualization sales rose 28% to $305 million against the Street’s estimate of $282 million. Auto sales rose 19% to $172 million, while analysts expected, and OEM & IP revenue fell 23% to $148 million against the Street’s $116 million estimate.

More: The Turing test has arrived for Nvidia

Of the 35 analysts who cover Nvidia, 24 have buy or overweight ratings, 10 have hold ratings and one has a sell rating, with an average price target of $285.94.

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