Nvidia (NVDA -0.66%) has benefited greatly from the recent graphics card scarcity as high demand and limited supply have driven up GPU (graphics processing unit) prices and accelerated the company’s revenue and earnings growth.
It appears that Nvidia is finally losing that catalyst, though. See what’s wrong with the graphics card business and how unfavorable pricing conditions can make things worse for this tech stock in 2022, which has already suffered huge losses.
It appears that the market for graphics cards is stalling.
In recent years, demand for GPUs has exceeded supply. The main factors driving graphics card sales in recent quarters have been the pandemic-driven demand from gamers, updated goods released by Nvidia, and demand from cryptocurrency miners.
In addition, because there are fewer graphics cards available now due to supply chain bottlenecks brought on by the worldwide chip shortage, prices have increased.
But it currently seems as though demand for GPUs may be declining. In the first quarter of 2022 compared to the last quarter of 2021, GPU shipments (including integrated graphics cards) were down 6.2%, according to Jon Peddie Research.
Sales of Nvidia’s discrete GPUs, on the other hand, increased 1.4% quarter over quarter. However, according to Jon Peddie Research, this year’s GPU demand may be severely hampered by a number of factors, including the conflict between Russia and Ukraine, Chinese government restrictions, and inflation.
According to the company, this year’s growth in GPU shipments may only be 2% to 3%. Another prediction made at the beginning of the year anticipated a 10% growth in GPU shipments in 2022.
The bad news is that GPU demand is certainly slowing, as seen by management’s remarks on the company’s May earnings conference call. Low GPU sales in China and Russia might have a $400 million negative impact on the company’s gaming revenue in the current quarter.
Nevertheless, there may be further difficulties due to the weak demand for personal computers (PCs) and the decline in demand from cryptocurrency miners.
The addressable market for Nvidia would be smaller this year, according to IDC’s prediction that PC shipments could decline by 8.2%. Nvidia’s sales may suffer as a result of a decline in bitcoin miners’ demand for GPUs.
A quarter of the discrete graphics cards sold in the first half of 2021 were purchased by cryptocurrency miners. However, this year’s decline in cryptocurrency prices has prompted miners to list their GPUs for sale as a result, as low prices mean that mining profitability has decreased. Prices are declining as a result of increasing inventories of graphics prices at retailers as a result of the cheaper used GPU supply and less demand.
In actuality, the cost of Nvidia’s top-tier RTX 3090 Ti graphics card has dropped by 16% from the suggested retail price (MSRP). This isn’t good news for Nvidia because past experience shows that a decline in graphics card prices can have a significant negative impact on the business.
The Nvidia stock could experience more immediate suffering
The value of Nvidia stock has decreased by 50% so far in 2014. The corporation has already issued a warning that the current quarter could be very difficult for its gaming sector. That raises a lot of concerns because, with $3.62 billion in revenue last quarter, gaming was Nvidia’s second-largest revenue source.
In the first quarter of fiscal 2023 (which began on May 1, 2022), Nvidia’s gaming revenue soared 31% year over year, accounting for slightly over 43% of its total revenue.
Therefore, Nvidia may experience difficulties as a result of the video gaming industry losing pace, which could hinder the company’s expansion. Investors won’t want to see that because Nvidia has a high stock valuation and has to continue growing quickly to justify its high multiples.
Nvidia is currently trading at 12 times sales and 39 times trailing earnings. The price-to-sales ratio of 2.4 and average earnings multiple of 20 of the S&P 500 are much greater than those figures.
As a result, there is a chance that Nvidia stock will decline more this year as a result of unfavorable circumstances in the gaming GPU market. However, given Nvidia’s strong position in this market and its sizable installed base of customers in an upgrade window, it wouldn’t be unexpected to see any weakening in the gaming industry as being only temporary in nature.