Why NVIDIA's Stock Has Collapsed – The Motley Fool

NVIDIAof (NASDAQ: NVDA) Stocks dropped after the announcement of financial results announced on Nov. 15, with the mid-year release of $ 2.7 billion in revenue forecasts for the current quarter, which is below expectations of investors. analysts, who were counting on $ 3.4 billion.

Instead of aiming for revenue growth of nearly 17% for the quarter, the graphics processor maker now informs its shareholders that its sales are expected to fall more than 7% from the same period last year.

Let's review what happened.

The cryptocurrency boom in bankruptcy

As you may remember, cryptocurrency prices have been booming. This has led to a massive demand in the graphics processing unit (GPU) – NVIDIA's main product line – as these devices are used to perform the calculations needed to exploit cryptocurrencies, such as Ethereum.

However, crater demand for GPUs used for crypto-currency mining is twofold. First, the general market for cryptocurrency has plummeted. Ethereum, for example, is trading at just over $ 176, while it peaked at about $ 1,400 in January. Digital tokens worth less than before, the profitability of the purchase of equipment and the billing of an electricity bill to produce them decreases considerably.

In addition, following a previous phenomenon with Bitcoin, chipmakers like Bitmain have started producing specialized chips, called application-specific integrated circuits, or ASICs, to perform the calculations to produce the most valuable crypto-currencies. These ASICs have only one business and are ultimately much better at producing these crypto-currencies than GPUs. Thus, GPUs have been largely supplanted by ASICs for crypto-currency mining.

With this experience in mind, we can now understand what happened to NVIDIA.

Too much channel inventory

Colette Kress, NVIDIA's CFO, said in the third quarter that its gaming activity was "below expectations, as post-encryption stocks took longer than expected to sell."

"The prices of game cards, which were raised after the crypto crash, took longer than expected to normalize," said Kress.

In the fourth quarter, NVIDIA is expected to continue to suffer from cryptocurrency issues.

"Our fourth quarter gaming outlook reflects very few deliveries in the mid-range Pascal segment to allow channel inventory to normalize," Kress said.

As a reminder, as NVIDIA launched its new Turing-based GeForce RTX cards for the high end of the gaming market (Kress said on the phone that "high-end Pascal cards have sold well in front of RTX") ), Mid-range gaming graphics cards are still based on the old Pascal architecture.

What did the CEO have to say?

At the call, NVIDIA CEO, Jensen Huang, offered an extra color on what happened.

"[We] Huang acknowledged. The executive said NVIDIA expected prices for graphics cards in the channel would drop. Because of this decline, the company is betting that "[shipment] volume [will] to be elastic with prices. "

The manager also said that he was optimistic that "now that prices have stabilized, customers will come back and buy."

"I guess when prices are volatile in the chain, some people are probably waiting for prices to stabilize, which has taken longer than expected, frankly," Huang added. "But now that the levels are correct, we expect the market to return to normal."