Nvidia Q3 2022 – Crypto crunch

Exiting miners hammer Nvidia’s numbers

• Nvidia issued a warning on its Q3 2022 performance as the crypto crash and subsequent winter have hammered demand for graphics cards that are used for mining crypto currency.
• Q2 2022 revenue / gross margins will be $6.7bn / 43.7% (+/- 50bp) a very far cry from guidance of $8.10bn / 65.1% and consensus which was not far from consensus estimates.
• The main culprit was gaming where revenues have fallen by 33% YoY to $2.04bn.
• This is not because people are playing fewer games but because graphics cards are the core component of rigs that are used for mining cryptocurrency.
• The cost of Bitcoin mining is about $12,000 per Bitcoin and now that marginal profit has fallen from $60,000 per Bitcoin to $10,000, all but the most efficient miners are being forced out of the market.
• This has been apparent for some time as the second-hand market for Nvidia graphics cards has been under considerable pressure recently as exiting miners liquidate their equipment.
• The most surprising is the sudden pressure on gross margin which has fallen by a massive 25.4% points which I suspect is a result of commitments it had made on foundry capacity that it will no longer need.
• The data centre also fell a bit short of expectations but still grew by 66% YoY and was only short due to component shortages rather than demand.
• This combined with very steady growth from the cloud providers this quarter leaves me unconcerned with regard to this segment.
• The company stressed that its gross margin profile remained intact but I suspect that it will need to demonstrate this to the market before 65% margins will again be seen as normal.
• This warning is another sign that the semiconductor cycle may already be beginning to roll over no doubt accelerated by interest rate hikes to combat inflation which in turn have hurt end demand.
• I like Nvidia’s fundamentals as it is a very well-run company that has executed extremely well in leveraging its excellence in graphics into other areas that have turned into major secular trends like AI.
• However, the market has afforded a blue-sky valuation to Nvidia that now may get hit hard as the promise of high levels of growth into perpetuity starts to look more doubtful.
• This combined with my worries about the semiconductor cycle generally is why I still want to own the more defensive end of the sector which has lower valuation and secular growth.
• Here, I continue to prefer Qualcomm, MediaTek and TSMC.