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Nvidia Corporation (NASDAQ: NVDA) stock is currently down nearly 50% as the GPU maker continues to struggle. Nvidia’s troubles date back to a few years when the stock continued to outperform, but now it’s increasingly struggling due to a series of headwinds, including the demise of the cryptocurrency. Management reiterated last quarter that it will take time for the market to clear excess inventory, and until then sales will be under pressure. The excess inventory largely comes from mining rigs bought in excess quantities to mine very profitable crypto coins that are no longer viable.
Where is the market headed?
Meanwhile, GPU prices have fallen as demand continues to falter. Nvidia hasn’t had any major problems, mainly due to the fact that price drops have severely impacted secondary sales. This means that margins have remained more resilient than they would otherwise have been. On the other hand, a weakening market has meant that sales have continued to decline. Revenue continued to decline in the most recent quarter as lower sales led to a 12% decline QoQ and a 17% YoY decline. This trend is expected to continue in the coming quarters.
New GPUs are expected to hit the market (mainly the 4000 series) and will mainly target the mid-range PC market, more specifically laptops. These could help Nvidia win some additional customers and cushion some of the hit from weaker sales.
However, headwinds remain with PC demand, particularly with desktop sales hitting a 20-year low, and as such GPU sales are likely to remain under pressure. Additionally, older GPUs are increasingly being discounted due to excess inventory in the market. This means consumers are likely to prefer slightly older versions and used GPUs rather than buying new high-end performance GPUs – or possibly even mid-end GPUs, which could still be more expensive.
Overall, the company’s margins are lower, and declining appropriately, as rising costs continue to weigh on net income, which fell 50%. Both inflationary pressures and a slowdown in demand are now weighing on Nvidia’s margins, but margins should stabilize over the next few quarters. The real problem remains with sales, which are unlikely to recover anytime soon.
On the bright side, data center revenue has also been on an upward trend lately, with expected growth of 12-15% for the year. This means Nvidia should continue to grow at double-digit rates, and possibly around 20% for the year. The new H100 systems are increasingly in demand from those running in the cloud, meaning one of the few industries to have weathered the recession outlook should remain relatively resilient in terms of demand in 2023. This bodes well for Nvidia.
The real story for the GPU market is cryptocurrency, and many cryptocurrencies have declined significantly since central banks started raising interest rates. For the foreseeable future, major economies and major central banks are expected to continue withdrawing liquidity from the market. This is putting pressure on companies like Bitcoin and could push prices to $11,000 levels, which would cause even more mining rigs to come off the market.
As crypto prices fall and mining becomes unprofitable, the GPU glut will only increase. Additionally, miners are now increasingly consolidating among a few players, putting further pressure on remaining miners and demand for GPUs. Meanwhile, companies like Ethereum (ETC-USD) have decided they will stick with GPUs to mine their cryptocurrencies, which should support demand if prices stay within the current trading range.
Central banks, notably the European Central Bank and Federal Reserve, have indicated that they will continue to pull liquidity out of the market and forecasts are likely to increasingly push M2 levels towards $70 trillion levels. That would be a drop from current levels of around $90 trillion. To return to historical trends, M2 would need to fall back to around $60 trillion levels. This would mean that the cryptocurrency will remain under pressure for the foreseeable future. The money supply remains key to cryptocurrency prices, and falling liquidity will be a bane to many crypto operations.
Second, the crypto hash rate for bitcoin has been volatile, hitting all-time highs before retreating. The declining hash rate, which may seem positive, only suggests that the total number of miners is declining. This trend of consolidation and hash rate improvement will make it harder for the mining operation to be profitable at this level, further putting pressure on overall GPU sales.
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As such, Nvidia is very vulnerable to a slowdown in the coming quarters. The first signs of channels are already indicating that the semiconductor industry is in a slight downturn. Taiwan Semiconductor Manufacturing Company Limited (TSM) revenue is declining and the extent to which revenue is declining is a general indication of this trend.
Where are finances and valuation headed?
Nvidia is expected to continue to see revenue decline for the next few quarters and could bottom out in Q3 2023. This would mean that earnings could fall another 10-15% given current demand trends which would put further pressure on the valuation.
While a number of analysts have claimed that Nvidia is unlikely to experience another slowdown, there is very little evidence that it will. This is likely to push margins further down and therefore means that the forward P/E ratio is likely to be around 50-60 times earnings, making the likelihood of the stock falling further a real possibility. Sales are likely to be somewhat lower; Currently, analysts’ average estimate is around $6 billion, but it could fall below $5.9 billion from last quarter.
Revenue aside, gross income, which was up 53-54% last quarter, could also come under pressure again, falling further and heading towards 50% as the company continues to suffer from pricing pressures. Meanwhile, NVDA stock technicals show that the market is clearly poised for further declines, with the put-to-call ratio heavily biased towards puts at 1.5. This makes it clear that Nvidia is currently not viewed positively by investors and retailers.
To sum up, Nvidia Corporation continues to face a number of issues going into 2023. Considering that much of the revenue has been generated from an unsustainable market i.e. cryptocurrency, the company will likely have a much harder time getting back on track in the near term. This is putting pressure on the stock to fall further and the stock could head towards $100-110 in the next few quarters as interest rates continue to rise and discount rates continue to rise. Investors looking for a long-term investment may want to keep investing in Nvidia Corporation stock provided they’re willing to weather the volatility.
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