Nvidia's (NVDA +4.30%) 2022 wasn't what any investor wanted. The stock was down 50%, and earnings fell as well. Many headwinds that affected Nvidia were out of its control, but that isn't an excuse for failure; Nvidia has experienced the same situation before and apparently hasn't learned its lesson.
So will the stock be able to turn around in 2023? Let's find out.
Image source: Nvidia.
The cryptocurrency market bust claims another victim
The biggest shock wave Nvidia experienced in 2022 was directly linked to the implosion of cryptocurrencies. Nvidia's primary product, graphics processing units (GPUs), is essential in the crypto mining world. The same hardware that can run engineering simulations, produce lifelike graphics, and power artificial intelligence programs can also process calculations to mine cryptocurrencies.
After the crypto markets tanked, many miners shut down their systems, and practically none purchased new, more powerful GPUs to continue mining. This had a twofold effect on Nvidia. First, demand for Nvidia's gaming GPUs (the variety used to mine cryptocurrency) evaporated, at least in the crypto miner crowd. Second, many miners sold their GPUs, flooding the market with inexpensive GPUs that anyone building a gaming system could pick up for less than the cost of a new one. This severely affected Nvidia's Q3 of FY 2023 (ending October 30), with its gaming division revenue falling 51% to $1.57 billion.
While this headwind may be behind us, it may take a while for Nvidia to cycle through inventory and for the used market to deplete, meaning the effects could drag on into 2023.
Unfortunately, this isn't the first time Nvidia has made this mistake with cryptocurrencies. Back in 2018, the crypto bubble burst, eliminating GPU demand and affecting Nvidia's revenue. It took the effects of the pandemic (which brought great demand for gaming GPUs) for Nvidia to return to the revenue levels seen in 2018.
NVDA Revenue (Quarterly) data by YCharts
As a result, 2023 could be tricky for Nvidia, as its gaming division will likely stay below its 2021 revenue levels for some time. But what about its other segments?
Revenue is falling, and expenses are rising
While gaming used to be Nvidia's largest division, it no longer holds that title. Instead, its data center division is now the largest (although it claimed that title before gaming revenue shrank). Q3 was a lot better for this division, with revenue up 31% year over year to $3.83 billion. However, revenue was up only 1% over Q2, which is a massive cause for concern, as this division doesn't display any cyclicality.
Besides the data center and gaming divisions, professional visualization (Nvidia's professional metaverse) saw revenue fall 65% to $200 million, while automotive and embedded revenue rose 86% to $251 million. These two segments aren't to be ignored, but they aren't nearly the size of data centers or gaming, so they don't affect results as much.
NASDAQ: NVDA
Key Data Points
Despite two segments moving up and two moving down, overall revenue fell 17% in Q3. But the real problem was earnings. Earnings per share (EPS) were down 72% to $0.27, thanks to a 31% increase in operating expenses. So while Nvidia isn't losing money yet, it needs to either shore up revenue streams or reduce expenses to avoid going into the red.
Wall Street analysts expect Nvidia to grow revenue by 8.9% in FY 2024 (ending January 2024) and EPS to rise as well, so the community thinks Nvidia has everything it needs to get back on track.
So does that make me a buyer? No.
Analysts project EPS of $4.31 in FY 2024, which means Nvidia trades at 34 times forward earnings. That's a premium price for a company that could also be affected by consumers who don't want to spend as much money, which would further affect the gaming division.
Although I still hold Nvidia stock, I'm not buying any more until I can see the business trending in the right direction. This can occur through revenue growth or the stabilization of operating expenses. Until then, I'm content with holding my Nvidia shares, as there are much better values with more certain futures than Nvidia.
