'Crypto hangover' hammers Nvidia's outlook, shares drop 17 per cent

Chip designer Nvidia Corp on Thursday forecast disappointing sales for the holiday quarter, pinning the blame on unsold chips piling up with distributors and retailers after the evaporation of the cryptocurrency mining boom.

The Santa Clara, California-based company also posted sales that missed expectations for its third quarter. Shares plunged nearly 17 per cent in late trading to $168.32.

For decades, Nvidia has supplied gaming cards to boost computer graphics, but in recent years cryptocurrency miners adopted the company’s cards to turn bits into wealth.

Chief Executive Jensen Huang said prices for Nvidia’s gaming cards had risen with the cryptocurrency frenzy, driving some buyers away. As the frenzy receded and card prices came down, Nvidia expected sales volumes to grow again as buyers who were priced out came back.

But that process was slower than Nvidia expected, Huang said, saying he expects inventories to be at normal levels by the end of the current quarter.

“The crypto hangover lasted longer than we expected,” Huang said on a conference call. “We thought we had done a better job managing the cryptocurrency dynamics,” he later added.

As a result, Nvidia stopped shipping some of its mid-priced chips to retailers, where they are stacking up in warehouses and the backs of stores. The company said its provision for inventories expanded more than five-fold in the fiscal third quarter to $70 million, and that the same provision had more than tripled for the first nine months of its fiscal year to $124 million.

The provisions for inventory lowered Nvidia’s gross margins by 1.8 percentage points in the quarter to 60.4 per cent, though margins were still up from 59.5 per cent a year earlier. Margins were also held down by $57 million in charges related to its previous generations of chips following the sharp fall-off in cryptocurrency mining demand.

Nvidia also said that its revenue derived from personal computer makers decreased by almost 40 per cent because of lower demand for GPU products targeted for use in cryptocurrency mining.

Nvidia said it expected current-quarter revenue of $2.7 billion, plus or minus 2 per cent, well below analysts’ average estimate of $3.40 billion, according to IBES data from Refinitiv.

Kinngai Chan, analyst at Summit Insights Group, said the problem was that inventories of Nvidia’s older gaming chips, based on a technology it calls Pascal, were piling up even as demand for new chips released in August was weaker than expected. Chan also said demand was faltering for Nvidia’s chips in data centers, where they are often used for artificial intelligence work such as teaching computers to recognize images.

“But we too are surprised at the below-$3 billion outlook” for the fourth quarter, Chan said.

The trade conflict between the United States and China may also be weighing on Nvidia, analysts said. Tariffs on many Chinese-made goods will rise to 25 per cent starting Jan. 1.

“Nvidia’s inventory build-up is suggesting that the escalating tariffs have started to pinch producers,” said Haris Anwar, analyst at Investing.com.

In an interview with Reuters, Huang said tariffs were “not really a factor” and that the fallout from the cryptocurrency decline was the sole reason for the inventory build.

Last month, rival Advanced Micro Devices Inc blamed dwindling demand for chips from cryptocurrency miners for its lower-than-expected fourth-quarter revenue forecast. AMD’s shares sank 7 per cent after Nvidia posted results after the market closed Thursday. Shares of chipmaker Micron Technology Inc, which sells memory to Nvidia for its gaming cards, sank 3.3 per cent in late trading.

Revenue from Nvidia’s closely watched data center chips business rose 58 per cent to $792 million, but missed analysts’ estimate of $820.4 million, according to FactSet.

The business powers cloud computing services of customers including Amazon.com Inc’s Amazon Web Services, Microsoft Corp’s Azure as well as Alphabet Inc’s Google Cloud.

During the investor call, analysts noted that those companies seem to be slowing their overall spending on data centers. Huang told Reuters that the specific uses for Nvidia’s chips such as machine learning were still expanding.

“Our overall penetration of the world’s data centers is still relatively small,” Huang said. Nvidia’s net income rose to $1.23 billion, or $1.97 per share, in the third-quarter ended Oct. 28, from $838 million, or $1.33 per share, a year earlier.

Excluding items, Nvidia earned $1.84 per share, Total revenue rose 20.7 per cent to $3.18 billion.

Analysts on average had expected revenue of $3.24 billion.