A slump in the video games sector is to blame NVIDIA Corporation’s recent profit warning, according to the US$444bn valued corporation’s preliminary results.
The NASDAQ-100 maker of GeForce graphics cards — a staple in any serious gamer’s rig — expects revenues of its gaming segment to fall by 44% sequentially in the lead up to its August 24 earnings call.
But while this expected slump in revenues aligns neatly with a gaming sector down 13% year on year as post-pandemic screen time drops, could the true culprit actually be the crypto bear market?
Gamers battle it out with crypto miners
Due to unprecedented demand, graphics processing units (GPUs) such as NVIDIA’s GeForce range were rarer than hen’s teeth throughout 2021.
That shortage was reflected in skyrocketing prices on the secondary market: NVIDIA’s high-powered RTX 3090 GPU was selling for up to three times the manufacturer’s suggested retail price (MSRP) on eBay in March 2021.
Tom’s Hardware — a site which gained popularity during the great GPU shortage by tracking eBay price data — said in March: “Every GPU we looked at shot up in prices over the past 90 days, which is even worse when you consider many of the GPUs were already overpriced from the previous 90 days.”
The price gouging didn’t stop there: while prices did start falling, an RXT 3090 was still selling for as much as 75% over MSRP on eBay come January 2022.
NVIDIA still couldn’t match demand.
But while gamers undoubtedly contributed to this demand, they had to battle it out with another class of buyers: Crypto miners.
High-powered GPUs like NVIDIA’s GeForce range are a hot commodity for Bitcoin and Ethereum miners and during the unprecedented crypto bull run of 2021, these miners scrambled to buy up as many GPUs as they could afford in order to generate lucrative mining profits.
While the average Call of Duty player continually got gazumped at the checkout by rich crypto mining companies and their powerful buying bots, NVIDIA was raking it in.
Annnd they yanked it right out of my cart. Great shopping experience once again, @BestBuy pic.twitter.com/hycn1LoGXW
— Sean Hollister (@StarFire2258) December 2, 2020
For the 2022 financial year, gaming revenue increased 61% year on year to US$12.5bln, making it NVIDIA’s most lucrative revenue stream by a factor of billions.
What happened?
Bear market takes hold
That’s an easy question to answer: Following the greatest bull run in crypto history, the crypto markets crashed in spectacular fashion, wiping over US$2tn (that’s a two with 10 zeros after it) in value as Bitcoin and Ethereum took an epic nosedive.
Crypto mining suddenly became less profitable but rather than riding out the storm, miners flooded the market with their cheap, used GPUs.
GPU flood is here.
Chinese miners and South Asian ecafes now dismantling their mining rigs and putting cards up for auction on livestreams.
3060 Ti's going for $300-$350 US ... pic.twitter.com/kphmIt7vZw
— Hassan Mujtaba (@hms1193) June 21, 2022
In turn, NVIDIA saw demand for its products plummet.
A GeForce RXT 3090 is now cheaper on eBay than from the retailers, while its RTX 3090Ti top-of-the-range model has had its price slashed by up to US$1,000.
Worse still, there are signs that NVIDIA wildly overestimated demand for its GPUs and now faces overflowing warehouses, judging by this preliminary statement: “Second quarter results are expected to include approximately $1.32bn of charges, primarily for inventory and related reserves, based on revised expectations of future demand.
Nvida’s crypto mining snub
There is no denying that crypto miners comprise a significant portion of NVIDIA’s customer base.
Some, including Tom’s Hardware, even suggest that the price of GPUs on the secondary market have a strong correlation with crypto mining profitability.
So why doesn’t NVIDIA acknowledge this?
According to the company’s 2022 regulatory filings: “It is difficult for us to estimate with any reasonable degree of precision the past or current impact of cryptocurrency mining, or forecast the future impact of cryptocurrency mining, on demand for our products.”
While a reasonable stance, distancing itself from the crypto economy could play to NVIDIA’s favour in more ways than one.
Crypto-exposed companies (i.e. those entities with vested interests into the crypto sector while not specifically operating within it) have proved susceptible to volatile crypto price swings in the past.
No better an example of this is Michael Saylor’s software company MicroStrategy, which as the world’s largest corporate holder of Bitcoin saw its market valuation plummet by over 80% in the latest bear market.
A broker’s input
Peter Garnry, head of equity strategy at Saxo Bank, has a blunt assessment of NVIDIA’s profit warning.
“The falling demand for NVIDIA’s GPUs has nothing to do with the gaming industry but instead the profitability of the Bitcoin mining industry,” said Garnry.
His view is backed up by historical data, noting: “The last time NVIDIA saw a dramatic decline in its share price was back in late 2018 as Bitcoin mining profitability went negative following Bitcoin’s massive speculative rally in late 2017 drumming up demand for GPUs for mining. This time is no different.”
According to Garnry: “NVIDIA does not know precisely the end use case of their GPUs.”
If that is true, then perhap NVIDIA needs a bit of a reality check.
Nvidia’s RTX 3080 GPU is used by miners and gamers alike — Source: nvidia.com
What is known is that NVIDIA attempted to diversify its revenue streams earlier this year with the US$66bn acquisition of smartphone chip designer Arm from Softbank, but the deal was nixed by regulators on competition grounds.
They could be feeling the sting of that failed acquisition today.