It’s widely believed that the recent sell-off of chipmaker Nvidia was due to waning demand for cryptocurrencies and the US-China trade war.
However, demand related to cryptocurrency mining accounts for less than 1 percent of the company’s revenue.
A key factor behind the price slide is actually the glut of Nvidia chips in the market.
Nvidia’s signature product is the graphics processing unit (GPU) and the company typically launches a new generation of products every two years.
In 2016 it introduced the GeForce GTX 1080Ti, which drew massive orders because of its wide range of gaming and artificial intelligence applications.
In the middle of this year, it was rumored that the chipmaker would introduce a new chip. Nvidia also said it would not manufacture the old chips any more, and hinted that the price for new chips could be much higher.
Fearful of running out of stock, distributors rushed to place orders, which helped bolster Nvidia’s second-quarter results.
The company launched the long-awaited RTX 2080 Ti in mid-September. But the performance upgrade of the new chip failed to match market expectations, while the price increase was considered excessive.
As distributors were still holding substantial inventories, the company’s third-quarter results were disappointing.
In particular, year-on-year revenue growth from the gaming sector slumped to 10 percent from over 50 percent in the previous quarter. Nvidia also expects a decline in its fiscal fourth-quarter sales.
Worrying that Nvidia’s growth story is coming to an end, investors dumped the chipmaker’s shares, which lost nearly 20 percent in a single day, bringing the cumulative loss since hitting the peak in October to 50 percent.
Nvidia’s conservative guidance is not surprising. Chinese regulators have suspended the approval of new games, hurting GPU demand growth. And the gaming segment happens to be Nvidia’s biggest revenue source.
Declining sales to cryptocurrency miners are also expected to drag demand. Bitcoin price surged to US$20,000 at the beginning of this year, boosting demand for GPU. But now the cryptocurrency has slumped to US$4,000, and many miners have halted operations. Some of them are even selling their GPUs in the secondary market.
Nevertheless, it’s too early to say that Nvidia’s high-growth story is over. Demand from the AI sector and data centers remains robust, and the two generate nearly one-fourth of the company’s revenue.
What Nvidia needs are a few quarters to let the market absorb excess stocks. Meanwhile, its shares have bounced back by about 18 percent from their recent trough.
This article appeared in the Hong Kong Economic Journal on Nov 28
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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