Windfall gains from the crypto boom vanish
Previously, we saw that Advanced Micro Devices (AMD) stock’s rally was partially offset by weakness in the gaming GPU (graphics processing unit) market as the decline of crypto-related demand created excess inventory. At the beginning of this year, AMD and NVIDIA (NVDA) stock rose as the two enjoyed windfall gains from an unexpected surge in GPU demand from crypto miners creating a supply shortage and raising GPU prices.
To address the supply shortage, both companies increased their GPU supply in the second quarter, but the crypto demand then faded. NVIDIA expected the excess GPU inventory to be absorbed by gamers, but that did not happen. NVIDIA CEO Jensen Huang was surprised by the magnitude of the GPU channel inventory. The crypto headwinds came just as NVIDIA was transitioning to RTX GPUs, which are facing slow adoption due to the scarcity of games using the new GPU’s real-time ray tracing feature.
Impact of excess inventory on NVIDIA’s earnings
Given the huge inventory, NVIDIA expects its revenue to fall 7% YoY (year-over-year) to $2.7 billion at the midpoint in fiscal 2019’s fourth quarter, undershooting analysts’ estimate by $700 million. To clear the channel’s excess inventory, the company is halting shipments of its mid-range Pascal GPUs, which contribute 33% of its gaming revenue. This guidance, which suggests the end of NVIDIA’s two-year revenue growth spree, sent the stock down 37%.
What challenges lie ahead for NVIDIA?
NVIDIA is now faced with reducing excess GPU inventory and rebuilding investors’ confidence in its growth. NVIDIA investors should keep an eye on the adoption of its ray tracing-enabled RTX GPU. If Turing GPUs are adopted by gamers, NVIDIA’s gaming revenue could return to strong double-digit percentage growth, reviving investors’ confidence and boosting its stock. Micron Technology (MU) could also benefit from Turing GPUs, as they feature Micron’s latest GDDR6 (graphics double data rate 6) memory. Next, we’ll look at Micron stock.
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