Nvidia (NVDA 3.71%) has been riding powerful tailwinds along its path to incredible growth over the last several years. Unfortunately, a few headwinds are now rising for Nvidia.
The Russian invasion of Ukraine led the company to decide it should stop sales in the region as a sign of solidarity with Ukraine. Elsewhere, the reinstatement of some temporary COVID-19 lockdowns in China is hurting its ability to manufacture products and lowering demand from consumers.
The overall impact for Nvidia is relatively small
Management elaborated on the impacts these headwinds will have in the company's conference call that followed its first-quarter earnings release last month:
Our outlook assumes an estimated impact of approximately $500 million relating to Russia and China COVID lockdowns. We estimate the impact of lower sell-through in Russia and China to affect our Q2 Gaming sell-in by $400 million. Furthermore, we estimate the absence of sales to Russia to have a $100 million impact on Q2 in Data Center.
Add up the two headwinds and sales in Q2 are expected to be $500 million lower because of the above-mentioned factors. Overall, Nvidia forecasts revenue of $8.1 billion in Q2, so the headwinds are likely to hurt sales by roughly 6.1%. Additionally, it adds some uncertainty to the business with the risk that these factors could persist. The Russian war in Ukraine has sadly lasted longer than many had hoped. China is implementing a zero-COVID policy that makes lockdowns more common in the country than anywhere else at this stage of the pandemic.
NVDA Revenue (Quarterly YoY Growth) data by YCharts.
So long as Nvidia can keep the negative impacts around that 6% range, investors need not become overly concerned. Nvidia grew revenue by 46% year over year in its most recent quarter, which ended in April. It has increased revenue by at least 38.7% from the prior year in each of its last 10 quarters, reaching as high as 83.8% year over year in the quarter ended in April 2021.
The cryptocurrency crash could be a wildcard for Nvidia
Interestingly, one other headwind that may hamper Nvidia's results is the crash in cryptocurrency prices over the last several months. Some cryptocurrency miners use Nvidia's graphic processing units to handle their mining efforts. For that reason, sales have sometimes been correlated with the price of digital assets. Of course, higher prices create more interest in mining and vice versa.
Management noted that the decrease in cryptocurrency prices reduces mining activity on graphic processing units. However, it also acknowledges that quantifying the impact on its business is challenging to accomplish at any rate of precision. Nvidia investors need to be mindful of this potential negative impact, but for now, it is no reason to panic.
NVDA PE Ratio data by YCharts.
Caution and not panic is the better recipe for Nvidia investors
While these headwinds are worth watching, investors should also note that Nvidia's business is growing phenomenally and delivering excellent profits. However, at a price-to-earnings ratio of 42.5 and a price-to-free-cash-flow ratio of 51, the stock is not cheap. Any signs of a slowdown could magnify the volatility of the stock price. Looking at the current valuation (see charts above), which is down off its highs, it's pretty clear that investors have already priced in the current risks.
