Opinion: This record amount in Nvidia revenue is a scary sight

The financial results of Nvidia Corp. came as a bit of a surprise to investors, and not on the good side: Product inventories doubled to an all-time high as the chip company gears up for a questionable holiday season.

Nvidia on Wednesday reported fiscal third-quarter revenue that beat analysts’ lower expectations, but the numbers weren’t that great. Revenue fell 17% to $5.9 billion, while profits were cut in half on inventory costs of $702 million, largely due to slower demand for data centers in China.

Gaming revenue fell 51% to $1.57 billion in the quarter. Nvidia said it is working with its retail partners to help move currently high-channel stocks.

While the company was writing off stock for China, its own stock of new products grew. Nvidia NVDA,
reported that total product inventory nearly doubled to $4.45 billion in the fiscal third quarter, compared to $2.23 billion a year ago and $3.89 billion in the prior quarter. Executives mentioned upcoming product launches, designed around the new Ada and Hopper architectures, when asked about the inventory gains.

In the semiconductor industry, high inventories can make investors nervous, especially after the industry has experienced so many supply constraints in recent years that it quickly turned into a glut of chips by 2022. With doubts about the demand for playing cards and consumers’ willingness to spend money in the middle of high inflation this holiday season, having all that product on hand only adds to the nerves.

Full profit coverage: Nvidia’s profit cut in half, but pinched servers to China offset earlier $400 million warning

Chief Financial Officer Colette Kress told MarketWatch in a phone interview Wednesday that the company’s high inventory levels were consistent with high sales levels.

“I really believe… it’s our highest level of inventory,” she said. “They go hand in hand.” Kress said she was confident in the success of Nvidia’s upcoming product launches.

Nvidia’s revenue peaked in the April 2022 quarter at $8.3 billion, and revenue has slowed over the past two quarters, with sluggish demand for games amid a transition to a new cycle and a decline in the demand for data centers in China due to COVID-19 lockdowns and US government restrictions.

For its data center customers, the new architectures promise major advances in computing power and artificial intelligence features, with Nvidia planning to ship the equivalent of a supercomputer in a box with its new products within the next year. Those kinds of advanced products weigh even more on inventory totals, Kress said, because of the price of the total package.

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

Bernstein Research analyst Stacy Rasgon believes Hopper-based products will begin shipping in the coming quarters, “at significantly higher prices.” He said in a recent post that he believes Nvidia’s numbers are likely to bottom out this quarter.

“We remain positive about the Hopper slope into next year, and believe the numbers are likely to have bottomed out at this point, with new cycles on the way and an attractive secular narrative, even without China potential,” Rasgon said. Tuesday in a profit preview.

Also read: Warren Buffett’s chip purchase is a classic example of why you “want to be greedy only when others are afraid”

Nvidia Chief Executive Jensen Huang reminded investors on a conference call that the company’s inventories are “never zero,” saying everyone is excited about the upcoming launches. But it doesn’t take long to conjure up a time when Nvidia went on holiday with a stock backlog that included new architecture and deeply disappointed investors: Four years ago, Huang had to cut his holiday earnings forecast twice a “crypto hangover” with a similar dynamic to the present moment

Investors should be confident that this holiday season won’t be the same, even as demand for some video game products slows down after a pandemic boom, just as the cryptocurrency market — some of which has been mined with Nvidia products — is going through a rough patch. Huang said Nvidia’s RTX 4080 and 4090 graphics cards based on the Ada Lovelace architecture had an “exceptional launch” and sold out.

Nvidia shares gained more than 2% in after-hours trading on Wednesday, suggesting some are betting this time will be different. That enthusiasm should translate into revenue for Nvidia so that this large inventory gain isn’t part of another write-off at some point in the future.

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