Opinion: This record amount in Nvidia’s earnings is a scary sight

The financial results of Nvidia Corp. had little surprise for investors, and not on the good side – product inventories doubled to a record high as the chip company gears up for the questionable holiday season.

Nvidia reports fiscal third quarter earnings it was slightly better than analysts’ expectations reduced on Wednesday, but the number is not so great. Revenue fell 17% to $5.9 billion, while earnings were cut in half thanks to a $702 million inventory charge, largely related to slower data center demand in China.

Game revenue in the quarter fell 51% to $1.57 billion. Nvidia said it is working with its retail partners to help stock current channel inventory.

As the company has written down its inventory for China, its new product inventory has grown. Nvidia NVDA,
-4.54%
reported that overall product inventories nearly doubled to $4.45 billion in the fiscal third quarter, compared with $2.23 billion a year ago and $3.89 billion in the prior quarter. Executives cited upcoming product launches, designed around the new Ada and Hopper architecture, when asked about inventory gains.

In the semiconductor industry, high inventories can make investors nervous, especially after the industry has many supply constraints in recent years that quickly swing chips in 2022. With doubts about the demand for gaming cards and the desire of consumers to spend in the middle of the sky. -high inflation this holiday season, having all the products in hand just amps up the nerves.

Full income coverage: Nvidia profit cut in half, but tweaked the server to China offset the previous $ 400 million warning

Chief Financial Officer Colette Kress told MarketWatch in a phone interview Wednesday that the company’s inventory levels are in line with its high revenue levels.

“I believe … that is the highest level of our inventory,” she said. “They are united.” Kress said he is confident in the success of Nvidia’s upcoming product launches.

Nvidia’s revenue peaked in the April 2022 quarter with $8.3 billion, and in the past two quarters revenue has slowed, with weak gaming demand amid the transition to a new cycle, and a drop in China’s data center demand due to COVID-19. US government lockdowns and restrictions.

For its data center customers, the new architecture promises major advances in computing power and artificial intelligence features, and Nvidia plans to ship the equivalent of a supercomputer in a box with its new products next year. That type of advanced product weighs in the total inventory more, Kress said, because of the total price of the package.

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

Bernstein Research analyst Stacy Rasgon believes that Hopper-based products will begin shipping in the next few quarters, “at a higher price point.” He said in a recent note that he believes Nvidia’s numbers are likely to rise this quarter.

“We remain positive on Hopper’s ramp up into next year, and believe that the numbers at this time are likely to bottom out, with new cycles and interesting secular stories even without China’s potential,” Rasgon said in Tuesday’s earnings preview note.

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Nvidia Chief Executive Officer Jensen Huang reminded investors on a conference call that the company’s inventory is “not zero,” and said everyone is enthusiastic about the upcoming launch. But it doesn’t take too long for the memory to conjure up a time when Nvidia went on vacation with an inventory backlog that included a new architecture and investors were greatly disappointed: Four years ago, Huang forced to cut his forecast for holiday earnings twice in the middle a “crypto hangover” with dynamics similar to the current moment

Investors need faith that this holiday season won’t be the same, even as demand for some videogame products slumps after the pandemic boom as the market for cryptocurrencies — some of which are mined alongside Nvidia products — hit a rough patch. Huang said that Nvidia’s RTX 4080 and 4090 graphics cards based on the Ada Lovelace architecture had a “remarkable launch,” and were selling well.

Shares of Nvidia gained more than 2% in after-hours trading on Wednesday, suggesting that some are betting that this time will be different. That enthusiasm should translate into revenue for Nvidia so that the huge gains in this inventory don’t become part of another article at some point in the future.

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