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Opinion: This record number in Nvidia revenue is a scary sight

Nvidia Corp.’s financial results were a bit of a surprise for investors, and not in a good way — product inventories doubled to a record high as the chip company gears up for a questionable holiday season.

Nvidia reported fiscal third-quarter earnings that were slightly better than analysts’ lowered expectations on Wednesday, but the numbers weren’t huge. Revenue fell 17% to $5.9 billion, while earnings halved thanks to a $702 million inventory charge, largely related to slower data center demand in China.

Gaming revenue in the quarter fell 51% to $1.57 billion. Nvidia said it is working with its retail partners to help move the high-channel inventory.

While the company was writing off inventory for China, its own new product inventory was growing. Nvidia NVDA,
reported that total product inventory nearly doubled to $4.45 billion in the third quarter, compared with $2.23 billion a year ago and $3.89 billion in the previous quarter. Executives cited the upcoming product launches, designed around the new Ada and Hopper architectures, when asked about the inventory gain.

In the semiconductor industry, high inventories can make investors nervous, especially after the industry has faced so many supply constraints in recent years that quickly swung into a glut of chips in 2022. With doubts about demand for playing cards and consumers̵[ads1]7; willingness to spend sky-high inflation this the holiday season, having all that product on hand just adds to the nerves.

Full earnings coverage: Nvidia profit halved, but custom servers for China offset earlier $400m warning

CFO Colette Kress told MarketWatch in a phone interview Wednesday that the company’s high inventory levels were relative to its high revenue levels.

“I think … it’s our highest level of inventory,” she said. “They go hand in hand.” 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 in the past two quarters, revenue has slowed, with sluggish gaming demand amid a transition to a new cycle, and a slowdown in China’s data center demand due to COVID -19 lockdowns and US government restrictions.

For its data center customers, the new architectures promise major advances in computing power and artificial intelligence capabilities, and Nvidia plans to ship the equivalent of a supercomputer in a box with its new products within the next year. These types of advanced products weigh even more heavily on inventory, Kress said, because of 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 products based on the Hopper will begin shipping in the next few quarters, “at significantly higher price points.” He said in a recent note that he thinks Nvidia’s numbers likely bottomed out this quarter.

“We remain bullish on the Hopper ramp into next year and believe that at this point numbers have likely bottomed out, with new cycles underway and an attractive secular story even without China potential,” Rasgon said in a preview note on Tuesday.

Also Read: Warren Buffett’s Chip Stock Purchase Is A Classic Example Of Why You Want To Be “Greedy Only When Others Are Scared”

Nvidia CEO Jensen Huang reminded investors on a conference call that the company’s inventory is “never zero,” and said everyone is excited about the upcoming launches. But it doesn’t take too long a memory to conjure up a time when Nvidia went into a holiday with a stock backlog that included new architecture and sorely disappointed investors: Four years ago, Huang had to cut his holiday revenue forecast twice amid a “crypto hangover ” with similar dynamics to the current moment

Investors need faith that this holiday season won’t be the same, even as demand for some video game products slows after a pandemic boom just as the cryptocurrency market — some of which has been mined with Nvidia products — has had a rough patch. Huang said Nvidia’s RTX 4080 and 4090 graphics cards based on the Ada Lovelace architecture had an “exceptional launch”, and sold out.

Nvidia shares rose more than 2% in after-hours trading Wednesday, suggesting some are betting this time will be different. That enthusiasm needs to translate into revenue for Nvidia so that this big gain in inventory doesn’t end up being part of another write-down at some point in the future.

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