Semiconductor company Nvidia (NVDA 3.71%) has benefited significantly over the past five years from manufacturing products that enable virtually every major multiyear trend in the tech industry. Consequently, its outstanding revenue growth over the last several years at one point seemed unstoppable. However, its recently reported fiscal 2023 quarter ended in June proved to be a big disappointment for investors.
Here is one big reason why Nvidia's second-quarter earnings results underwhelmed investors.
Gaming revenue growth ran into a wall
Nvidia's second-quarter fiscal 2023 total revenues of $6.7 billion were down 19% sequentially and only up 3% year on year. This number was far below the $8.1 billion outlook management provided on the first-quarter fiscal 2023 earnings call. So what was the culprit for this growth slowdown?
You can point to gaming revenue, a significant part of the total revenue, being down 44% sequentially and 33% year over year. And while management expected a slowdown in gaming due to weak European demand related to the war in Ukraine, COVID-19 lockdowns in China, and the slowing U.S. economy, it did not expect the drop-off to be this drastic.
Although the company likes to dance around the topic, an unknown but significant amount of crypto sales are included in its gaming segment. The sales channels Nvidia uses for its gaming customers are the same channels that crypto miners use to buy its products. So management claims never to know the extent of crypto sales. Still, they seem to strongly suspect how much crypto demand there actually is; some people have previously accused the company of keeping hidden from investors. For instance, the Securities and Exchange Commission sued and recently settled charges against Nvidia in May 2022 for downplaying the impact of crypto mining on its results in 2018.
A nasty cryptocurrency hangover
Crypto miners find graphics processing units (GPUs) faster than central processing units, or CPUs, for calculating the math problems involved in mining -- the main reason for high crypto miner demand for Nvidia's gaming GPUs.
These GPU sales to crypto miners were a massive benefit for Nvidia in 2021. Every crypto mining farm worldwide bought up vast amounts of Nvidia's GPUs during the crypto industry's bull market run last year. Demand for its GPUs went so high that it exceeded Nvidia's ability to supply the market, creating a GPU shortage. Moreover, it became difficult for true gamers at one point to buy a new graphics card. The company significantly ramped up its GPU production to satisfy this "gaming" demand. The artificial boost to gaming from crypto mining demand made the company inebriated from rapid revenue growth.
NVDA Revenue (TTM) data by YCharts.
Unfortunately for this GPU manufacturer, cryptocurrency markets appear negatively impacted by the Federal Reserve raising interest rates. With crypto miner GPU demand diving as the crypto industry experiences a bear market, Nvidia's projected 2022 GPU demand failed to materialize. As a result, good times have now turned into a hangover for the company.
Nvidia is holding onto $1.32 billion of inventory that it wants to sell rapidly at a discount before releasing its next-generation "Lovelace" gaming GPUs. Sadly for current Nvidia investors, it could take some time for this headache to go away. If you invest in this stock, you should not expect a quick rebound in results.
Gaming will eventually rebound
Fortunately for investors, cryptocurrency is not part of Nvidia's long-term investing thesis. While crypto has been lucrative in the past, the crypto market has a history of being so volatile that this business presents the company with far more problems than benefits. Management has built measures into its GPUs to make them less effective for crypto mining. It seems that the company wants to minimize the impact of crypto on its business.
Management believes in the gaming business, excluding crypto, over the long term. Chief Financial Officer Colette Kress said on the second-quarter 2023 earnings call that although gaming is navigating significant short-term macroeconomic challenges, the company believes the long-term fundamentals of gaming remain strong. In addition to gaming, Nvidia has several other solid long-term growth drivers across areas, like the data center, automotive, and vision systems that enable the metaverse.
So, if you are a long-term investor looking for a solid growth stock and can wait out near-term headwinds to its performance, this could be an excellent time to pick up a few shares.
