Opinion: This record figure in Nvidia earnings is a scary sight

Nvidia Corp.’s financial results came as a bit of a surprise to investors, and not on the good side — with product inventories hitting two record highs as the chip company braced for a questionable holiday season.

Nvidia reported fiscal third-quarter earnings on Wednesday that were slightly better than analysts’ lowered expectations, but the numbers weren’t huge. Revenue fell 17% to $5.9 billion, while profit was cut in half by a $702 million inventory charge.

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

While the company is clearing inventory for China, it has increased its new product inventory. Nvidia NVDA,
reported that total product inventory nearly doubled to $4.45 billion in the fiscal third quarter, compared with $2.23 billion a year ago and $3.89 billion in the prior quarter. When asked about inventory gains, executives cited product launches built around its new Ada and Hopper architectures.

High inventories in the semiconductor industry can unnerve investors, especially after the industry has experienced multiple supply constraints in recent years after quickly turning into a chip glut in 2022. With doubts about the demand for playing cards and the willingness of consumers to spend in the sky. – During this holiday season, high inflation and the availability of all products are making nerves stronger.

Full earnings coverage: Nvidia profits cut in half, but servers made to China offset earlier $400m warning

Chief Financial Officer Colette Kress told MarketWatch in a telephone interview on Wednesday that the company’s high level of inventory is consistent with its high level of revenue.

“I believe …. this is our highest level,” he said. “They go hand in hand.” Kress said he is confident about the success of Nvidia’s upcoming product launches.

Nvidia’s revenue peaked at $8.3 billion in the April 2022 quarter, and the past two quarters saw sluggish gaming demand amid the transition to a new era and reduced Chinese data center demand due to COVID-19. locks and US government restrictions.

For data center customers, the new architectures promise huge advances in computing power and artificial intelligence features, with Nvidia planning to ship the equivalent of a supercomputer in a box with its new products over the next year. Kress, because of the price of the total package, such advanced products weigh more heavily in the inventory total.

“It’s about the complexity of the system that we’ve built, that’s the inventory and what connects the pieces,” Kress said.

Bernstein Research analyst Stacy Rasgon believes Hopper-based products will start shipping at “materially higher prices” within the next few quarters. He said in his latest note that he believes Nvidia’s numbers will fall this quarter.

“We remain positive on Hopper’s decline next year and believe at this point the numbers are likely to have bottomed out, new cycles are brewing and there is a compelling secular story even without China potential,” Rasgon said in an earnings preview note on Tuesday.

Also read: Warren Buffett’s buying of chip stocks is a classic example of why you want to “get greedy only when others are afraid.”

Nvidia CEO Jensen Huang reminded investors during a conference call that the company’s stock is “never zero” and said everyone is excited about the upcoming presentations. But it doesn’t take a long memory to recall a time when Nvidia went on holiday with a new architecture and an inventory backlog that left investors very disappointed: Four years ago, Huang had to cut his holiday revenue forecast in half. “Crypto addiction” with similar dynamics to the current mother

Investors need confidence that this holiday season won’t be the same, even as demand for some video game products eases after the pandemic boom, while the cryptocurrency market — some mined by Nvidia products — is hitting a rough patch. Huang said Nvidia’s RTX 4080 and 4090 graphics cards, based on the Ada Lovelace architecture, had “exceptional sales” and were sold.

Shares of Nvidia 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 stocks doesn’t become part of another write-off at some point in the future.

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