The financial results of Nvidia Corp. surprised investors a little, and not on the good side – product inventories doubled to an all-time high as the chip company prepares for a dodgy holiday season.
Nvidia on Wednesday reported fiscal third-quarter revenue slightly above analysts’ discounted expectations, but the numbers weren’t so great. Revenue fell 17% to $5.9 billion, while profit was halved on a $702 million inventory charge, mostly related to slowing data center demand in China .
Gaming revenue in the quarter fell 51% to $1.57 billion. Nvidia said it was working with its retail partners to help move currently high-end inventory.
As the company wrote off its inventory for China, its own stock of new products increased. NVIDIA NVDA,
reported that its overall product inventory nearly doubled to $4.45 billion in the fiscal third quarter, from $2.23 billion a year ago and $3.89 billion in the prior quarter. Executives cited its upcoming product launches, designed around its new Ada and Hopper architectures, when asked about inventory gains.
In the semiconductor industry, high inventories can make investors nervous, especially after the industry has seen so many supply constraints in recent years that quickly turned into a glut of chips in 2022. With Doubts On the demand for gaming cards and consumers’ willingness to spend in mid-heaven-high inflation this holiday season, having all that product on hand only amplifies nerves.
Full profit coverage: Nvidia’s profit halved, but tweaked servers to China offset previous $400 million warning
Chief Financial Officer Colette Kress told MarketWatch in a phone interview Wednesday that the company’s high inventory levels were commensurate with its high revenue levels.
“I believe…this is our highest level of inventory,” she said. “They go together.” 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 over the past two quarters revenue has slowed, with sluggish gaming demand amid a transition to a new round and decline in demand for data centers in China due to COVID-19 US government lockdowns and restrictions.
For its data center customers, the new architectures promise major advances in computing power and artificial intelligence capabilities, with Nvidia planning to ship the equivalent of a supercomputer in a box with its new products over the course of next year. These types of advanced products weigh even more heavily on inventory totals, Kress said, due to the price of the total package.
“It’s about the complexity of the system we’re building, it’s what drives the inventory, the pieces of it together,” Kress said.
Bernstein Research analyst Stacy Rasgon believes that Hopper-based products will begin shipping in the coming quarters, “at significantly higher prices.” He said in a recent note that he thinks Nvidia’s numbers are likely bottoming out this quarter.
“We remain positive on Hopper’s ramp into next year, and believe the numbers have probably bottomed out at this point, with new cycles brewing and a secular history attractive even without the potential for China,” Rasgon said in an earnings preview note on Tuesday.
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Nvidia Chief Executive Jensen Huang reminded investors on a conference call that the company’s stocks are “never zero”, and said everyone is excited about upcoming launches. But it doesn’t take too long to reminisce about a time when Nvidia went on vacation with an order book that included a new architecture and some very disappointed investors: Four years ago, Huang had to cut his vacation revenue forecast to twice in the middle a “crypto hangover” with similar dynamics to the current moment
Investors need to believe this holiday season won’t be the same, even as demand for some video game products declines after a pandemic boom, as does the cryptocurrency market – some of which have been mined with Nvidia products – is having a tough time. Huang said Nvidia’s RTX 4080 and 4090 graphics cards based on the Ada Lovelace architecture had an “outstanding launch” and were sold out.
Nvidia shares gained more than 2% in after-hours trading on Wednesday, suggesting some are betting this time will be different. That excitement needs to translate into revenue for Nvidia so that this big inventory boost doesn’t end up being part of another writedown at some point in the future.