Will Nvidia Survive the Sell-Off?

The Santa-Clara-based chip manufacturer Nvidia Corporation (NASDAQ: NVDA) is one of the leading companies in the global semiconductor space and is currently ranked #134 on the Fortune 500 list. The company gained traction in the past two years thanks to a worldwide semiconductor shortage amid robust demand for chips. 

However, as macroeconomic headwinds catch up with the semiconductor industry, chip sales are projected to decline over the next few quarters. Nvidia recently released a preliminary statement regarding the estimated revenue shortfall due to declining market demand. 

Nvidia warns of weakening market demand 

Demand for personal electronics, including computers and gaming systems, skyrocketed during the initial months of the pandemic, spiking global semiconductor demand. This triggered an immense chip shortage worldwide, with companies scrambling to invest in chip manufacturing. To that end, Biden signed the landmark $52.70 billion Chips Act on August 9th. 

However, the trend has taken a sharp turn lately. The demand for personal electronics has been decelerating as the global economy slows down due to inflationary pressures and rising interest rates weighing on consumer spending. According to research firm Gartner, global semiconductor revenues are expected to grow by only 7% in fiscal 2022, compared to a 26.3% rise last year.  

Regarding this, Richard Gordon, Practice VP at Gartner, said, “Although chip shortages are abating, the global semiconductor market is entering a period of weakness, which will persist through 2023 when semiconductor revenue is projected to decline 2.5%.” 

Prominent chip makers Intel (NASDAQ: INTC) and Micron (NASDAQ: MU) have also issued a similar warning recently.  In fact, Micron Technology expects revenues to decline sequentially over several quarters due to a tepid demand environment. 

Deteriorating financials and more

According to preliminary second-quarter results, Nvidia’s second-quarter revenue is expected to amount to $6.70 billion, 17.28% below the previous $8.10 billion outlook. This decline can be attributed to a 33% year-over-year decline in Gaming revenues and a decline in channel partner sales. 

The company’s total revenue is expected to increase 3% year-over-year in the about-to-be-reported quarter.  

While Nvidia’s data center segment revenues are expected to come in at a record $3.81 billion, it is lower than the company’s initial projections. The weak performance of this segment is due to global supply chain disruptions. 

Following the release of the preliminary financial data on August 8th, NVDA stock plummeted 8% intraday. The stock is down 35.29% year-to-date. 

In its investor presentation in early 2022, Nvidia outlined the massive potential of its products and services that have a market opportunity of trillions of dollars, which looks pretty impressive on paper.

Further, at the end of May, the company estimated Q2 sales at $8.1 billion. So, the $1.3 billion shortfall should be extremely scary and drive down projections for the rest of the year.

Additionally, Nvidia forecast gross profit to decline by 44% and operating income to slide 64% in the quarter. So, its operating income would stand at $500 million in the July quarter.

Does it make sense to buy shares of a $450 billion company that might generate less than $8 billion in operating income in the next 12 months?

Is there a silver lining for NVDA stock investors?

While the industry tailwinds have sparked a sharp sell-off in NVDA stock, the long-term growth attributes remain strong. Legendary institutional investor Cathie Wood bought $65 million worth of NVDA stock following the release of the preliminary results, making it one of its top 25 most valuable holdings. 

This comes as the US passed the landmark “Chips+” bill to promote domestic semiconductor production. While the increasing China-Taiwan tensions have weighed on the global semiconductor industry as Taiwan houses the largest semiconductor manufacturing facility in the world, the U.S. is taking active steps to reduce its reliance on foreign economies. 

Thanks to substantial government subsidies, Nvidia should be able to maintain its profit margins despite waning sales.