This Nvidia profit record is a frightening sight

Nvidia Corp.’s financial results were a bit of a surprise to investors, and not on the good side — product inventories have doubled to a record high as the chip company prepares for a questionable holiday season.

Nvidia reported fiscal third-quarter revenue that was slightly better than cut analyst expectations on Wednesday, but the numbers weren’t great. Revenue fell 17% to $5.9 billion, while profits were halved thanks to inventory fees of $702 million, largely due to slowing data center demand in China.

Gaming revenue in the quarter decreased 51% to $1.57 billion. Nvidia said it’s working with its retail partners to help move existing high-channel inventories.

While the company was eliminating inventory for China, its inventory of new products was growing. NVIDIA NVDA,
It reported that its 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. The executives cited upcoming product launches, designed around the new Ada and Hopper architectures, when asked about stock gains.

In the semiconductor industry, rising inventories can make investors anxious, especially after the industry has faced several supply constraints in recent years that quickly turned into a chip glut in 2022. With doubts about demand for gaming cards and consumers’ willingness to spend amidst the sky-high Inflation this holiday season, having all that product on hand is nerve-wracking.

Full earnings coverage: Nvidia’s profit halved, but servers ported to China offset earlier $400m warning

Chief Financial Officer Colette Kress told MarketWatch in a phone interview Wednesday that the company’s high level of inventories is commensurate with its higher levels of revenue.

“I believe…it’s our highest level of inventory,” she said. “They walk hand in hand.” Kris said she is confident about the success of the upcoming Nvidia product launches.

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

For its data-center customers, the new architectures promise major advances in computing power and AI features, with Nvidia planning to ship the equivalent of a supercomputer in a box with its new products over the next year. Chris said these types of advanced products impact total inventory more, because of the price of the total package.

“It has to do with the complexity of the system that we’re building, and that’s what drives inventory, and the pieces of that together,” Chris said.

Bernstein Research analyst Stacy Rasgon believes that Hopper-based products will begin shipping over the next several quarters, “at materially higher price points.” He said in a recent note that he believes Nvidia’s numbers are likely to bottom out in the quarter.

“We remain positive on the Hopper Slope into next year, and believe numbers at this point are likely to be near bottom, with new cycles brewing and an attractive secular story even without China potential,” Rasgon said in an earnings preview note on Tuesday.

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Nvidia CEO Jensen Huang reminded investors on a conference call that the company’s inventories “never go to zero,” and said everyone was excited about the upcoming launches. But it doesn’t take much memory to conjure up a time when Nvidia went into vacation with a stockpile that included new architecture and vastly disappointed investors: Four years ago, Huang had to cut his holiday earnings forecast twice amid a “crypto hangover” with similar dynamics to the current moment.

Investors need to have faith that this holiday season will not be the same, even as demand for some video game products has plummeted after the pandemic boom just as the cryptocurrency market — some of which was mined with Nvidia products — has reached a rough patch. Huang said Nvidia’s RTX 4080 and 4090 graphics cards based on the Ada Lovelace architecture were an “exceptional launch” and sold out.

Nvidia shares gained more than 2% in after-hours trading Wednesday, indicating some are betting that this time will be different. That enthusiasm needs to translate into revenue for Nvidia so that this big gain in stock doesn’t end up being part of another writedown at some point in the future.

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