Nvidia announces video game chip sales will decline in the quarter due to COVID-19

Chipmaker Nvidia forecast its video game chip sales to decline in the current quarter and surprised some analysts by exposing new supply chain issues stemming from COVID-19 lockdowns in China.

Chief Executive Jensen Huang told Reuters that revenue from Nvidia’s gaming business will show a percentage decline in the mid-teens for the current quarter compared to the previous quarter.

“Overall, the game market is slowing down,” Huang said. Based on weaker market demand, Nvidia chose to reduce what it sells in the Chinese market, he said. Nvidia is also taking a hit from Russia and is seeing “slower selling” in Europe, he said.

Nvidia shares fell 6.7% in extended trading, even as the company’s first-quarter revenue and profit beat analysts’ estimates. Stocks are down around 40% so far this year, alongside a selloff in growth stocks on fears of aggressive interest rate hikes by the US Federal Reserve.

Concerns about inflation are spreading through the US economy as consumers weigh up purchases of items such as laptops and video game consoles.

Nvidia expects second-quarter revenue of $8.10 billion (around Rs. 62,842 crore), plus or minus 2%. Analysts on average had expected $8.45 billion (around Rs 65,557 crore), according to IBES data from Refinitiv. The lower revenue forecast included an estimated reduction of around $500 million (approximately Rs 3,879 crore) related to Russia and COVID lockdowns in China. Chief Financial Officer Colette Kress said the $500 million figure included about $400 million (about Rs 3,103 crore) lost in game sales in China and Russia, and another $100 million lost in data center sales in Russia.

Kress told analysts on the earnings call that China’s COVID lockdowns, in addition to affecting logistics, were hitting consumer spending.

Dan Morgan, senior portfolio manager at Synovus Trust, said it was baffling that a company that has weathered supply hurdles so well so far is suddenly hitting a bump in the road.

Kinngai Chan, an analyst at Summit Insights Group, said nearly all of the tech companies that missed their outlook blamed the Russia-Ukraine conflict and China’s COVID lockdowns. He expected Nvidia to face more slowdowns in the future.

One analyst was more optimistic.

“The after-hours pullback is an overreaction to geopolitical events beyond the company’s control, not a weakening demand environment,” Edward Jones analyst Logan Purk said, noting the stock price drop. Nvidia stock.

Lower graphics chip prices and lower discretionary spending amid high inflation are expected to put pressure on Nvidia’s gaming business, experts say.

A rout in the cryptocurrency market has also hurt demand for its graphics processing units, which are favored by cryptocurrency miners. Kress, the chief financial officer, said in a statement Wednesday that Nvidia saw a 52% year-over-year decline in its “OEM and other revenue” category due to lower processor revenue for the cryptocurrency mining.

Still, demand from data center customers has remained strong as more companies are moving to the cloud and integrating artificial intelligence into their operations. That and auto sales will help offset the decline in games, Kress said. Data center revenue for the first quarter reached a record $3.75 billion (around Rs 29,097 crore), up 83% year on year. Gaming revenue in the first quarter also hit a record $3.62 billion (around Rs 28,086 crore), up 31% year on year.

Revenue for the first quarter ended May 1 rose 46% to a record $8.29 billion (approximately Rs. 64,320 crore). Excluding items, the company earned $1.36 (around Rs 105) per share, beating estimates of $1.29 (around Rs 100).

© Thomson Reuters 2022

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