On August 8 before the market on U.S. stocks, Nvidia announced preliminary figures for its fiscal 2023 second quarter results: ● Revenue of $6.7 billion versus guidance of $8.1 billion ● Non-GAAP margin of 46.1% versus guidance of 67.1% ● Gaming business revenue of $2.03 billion, down 44% YoY ● Data center revenue of $3.81 billion, up 1% YoY ● Professional Visualization revenue of $500 million, down 20 percent sequentially
These numbers are bad, and NVIDIA’s press release indicates that the company is likely to post a net loss (based on GAAP) in the second quarter, while significantly lowering its earnings guidance for the third and fourth quarters, which will be below market expectations.
NVIDIA is blaming the decline on macroeconomic headwinds. Investors should ignore this rhetoric; the real reason may be that cryptocurrency miners have slowed down their purchases of NVIDIA GPUs. Sales on NVIDIA’s gaming and professional visualization businesses have been largely driven by cryptocurrency mining in recent years, though its management wants investors to think otherwise. Investors should remain wary of this.
Right now, ethereum is undoubtedly the most valuable cryptocurrency for GPU mining. But as it is moving from proof-of-work (compute-intensive mining) to proof-of-stake (cryptocurrency ownership and minimal compute load), miners have slowed down their purchases of Nvidia GPUs. Ether is in the final stages of testing proof-of-stake code and is likely to make the switch by early Q4 (or late September).
During the Ethernet mining boom, miners pushed GPU prices up to more than twice the suggested retail price. In addition to strong unit sales, Nvidia was able to improve margins by setting high prices. But now that mining demand has slowed, some NVIDIA GPUs are priced well below the suggested retail price. The NVIDIA GPU price cuts are just beginning, and worse is yet to come.
Despite the sharp drop in demand, NVIDIA’s partners still have large inventories to move, and miners may also be selling used GPUs into the market. Ether hash rate history shows that miners have purchased a large number of GPUs for mining in the past two years. All of this excess demand could disappear. NVIDIA GPU sales could fall by millions of units. The company’s third and fourth quarters could also be poor. Investors will eventually learn how much of Nvidia’s gaming and professional visualization business sales are actually driven by mining.
Nvidia’s current valuation is still too high, and investors may be disappointed after buying Nvidia; their pain may just be beginning.
Investors may think that Nvidia’s poor second quarter results are only temporary due to demand factors in China and Russia. However, a review of the ethereum mining situation suggests that this belief is misguided.
Investors who believe in the “high growth” narrative may soon see what happens to growth companies with high P/E ratios when growth turns negative. Nvidia currently trades at a P/E ratio of 47x (TTM). With declining earnings, this number could easily reach triple digits in the next few quarters if the stock price does not fall significantly. Such a high valuation is unsustainable, especially with the Federal Reserve aggressively tightening monetary policy. Investors should avoid buying Nvidia now and wait until it drops to a reasonable valuation. NVIDIA is a great company, but deteriorating fundamentals suggest that its valuation is unreasonable.
Summing up
● NVIDIA’s pre-disclosed second-quarter earnings numbers were terrible.
● The company’s management continues to hide the impact of cryptocurrency mining on its sales.
● The company’s results will continue to deteriorate in the coming quarters as ethereum moves away from NVIDIA GPU mining.
