Opinion: This record Nvidia revenue figure is a scary sight

Nvidia Corp’s financial results came as a bit of a surprise to investors, and not on the bright side — product inventories doubled to a record high as the chip company braces for a questionable holiday season.

Nvidia reported revenue for the third quarter that was slightly better than analysts’ reduced expectations on Wednesday, but the numbers weren’t great. Revenue fell 17% to $5.9 billion while profit was halved due to a $702 million inventory charge, largely due to slower data center demand in China.

Gaming revenue fell 51% to $1.57 billion for the quarter. Nvidia said it is working with its retail partners to move channels’ current high inventory levels.

As the company wrote off inventory for China, its own inventory of new products grew. 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 built around the new Ada and Hopper architectures when asked about inventory gains.

In the semiconductor industry, high inventories can make investors nervous, especially after the industry has faced so many supply shortages in recent years that quickly led to a chip oversupply in 2022. With doubts about the demand for playing cards and consumers’ readiness to buy in heaven – high inflation this holiday season, having all these products on hand only strengthens the nerves.

Full Income Coverage: Nvidia’s profit was halved, but optimized servers to China offset an earlier $400 million warning

Chief Financial Officer Colette Kress told MarketWatch in a phone interview on Wednesday that the company’s high inventory levels are consistent with strong earnings.

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

Nvidia’s revenue peaked at $8.3 billion in April 2022, and over the past two quarters, revenue has slowed as gaming demand has been sluggish during the transition to a new cycle and data center demand in China due to COVID-19 lockdowns and US government restrictions.

For its data center customers, the new architectures promise major advances in computing power and artificial intelligence capabilities, with Nvidia planning to ship the equivalent of a supercomputer in a box with its new products over the course of the next year. These types of advanced products put even more strain on inventories because of the price of the whole package, Kress said.

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

Bernstein Research analyst Stacy Rasgon believes hopper-based products will ship “at significantly higher prices” over the next few quarters. He said in a recent note that he believes Nvidia’s numbers are likely to bottom out this quarter.

“We remain positive on the hopper ramp into next year and believe numbers are likely near bottoming by that point, with new cycles brewing and an attractive secular history, even without China potential.” , Rasgon said in an earnings preview on Tuesday.

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

Nvidia Chief Executive Jensen Huang reminded investors in 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 long to recall a time when Nvidia went on vacation with inventory that included new architectures and big disappointed investors: Four years ago, Huang had to cut his holiday forecast twice midst a “crypto hangover” with similar dynamics as at the present moment

Investors need to have faith that this holiday season won’t be the same, even as demand for some video game products tumbles after a pandemic boom while the cryptocurrency market — some of which mined with Nvidia products — is going through a rough patch. Huang said that Nvidia’s RTX 4080 and 4090 graphics cards, based on the Ada Lovelace architecture, had an “extraordinary start” and sold out.

Nvidia shares are up more than 2% after the close on Wednesday, suggesting some are betting this time will be different. That enthusiasm needs to translate into revenue for Nvidia lest this large inventory build-up become part of another write-down at some point in the future.

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