Nvidia Says Video Game Market Is Slowing Down; shares fall 7%

Technology company Nvidia’s logo is seen at its headquarters in Santa Clara, Calif., Feb. 11, 2015. REUTERS/Robert Galbraith

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May 25 (Reuters) – Chip designer Nvidia Corp (NVDA.O) predicted that sales of video game chips would decline in the current quarter, startling some analysts by raising new supply chain issues due to the COVID-19 lockdowns in China.

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

“In general, the gaming market is slowing down,” Huang said. Based on weaker market demand, Nvidia has chosen to reduce what it sells in the Chinese market, he said. Nvidia is also taking a hit from Russia, seeing “slower resale” in Europe, he said.

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Nvidia shares fell 6.7% during extended trading, though the company’s first-quarter earnings and earnings exceeded analyst estimates. Shares are down about 40% so far this year, along with a broader sell-off in growth stocks amid concerns about aggressive rate hikes by the US Federal Reserve.

Inflation concerns are spreading through the US economy as consumers weigh purchases of items such as laptops and video game consoles.

Nvidia forecast second-quarter revenue of $8.10 billion, plus or minus 2%. Analysts expected an average of $8.45 billion, according to IBES data from Refinitiv.

The lower revenue forecast included an estimated reduction of approximately $500 million related to Russia and the COVID lockdowns in China. Chief Financial Officer Colette Kress said the $500 million figure included about $400 million lost in gaming sales in China and Russia, and another $100 million lost in data center sales in Russia.

Kress told analysts on the earnings call that the COVID lockdowns in China hit consumer spending in addition to logistics.

Dan Morgan, senior portfolio manager at Synovus Trust, said it was puzzling that a company that has navigated supply hurdles so well so far has suddenly encountered a bump in the road.

Kinngai Chan, an analyst at Summit Insights Group, said nearly every tech company that missed the outlook is blaming the Russia-Ukraine conflict and China’s COVID lockdowns. He expected Nvidia to face more downturns in the future.

An analyst was more optimistic.

“The after-hours slump is an exaggerated response to geopolitical events beyond the company’s control, not a weakening demand environment,” said Edward Jones analyst Logan Purk, pointing to the decline in Nvidia’s stock price.

According to experts, weaker graphics chip prices and lower discretionary spending amid high inflation will put pressure on Nvidia’s gaming business.

A defeat in the cryptocurrency market also hurt demand for its graphics processing units, which are favored by cryptocurrency miners. Kress, the CFO, said in a statement Wednesday that Nvidia had a 52% year-over-year decline in the “OEM and other revenue” category due to a decline in revenue from cryptocurrency mining processors.

Still, data center customer demand remained strong as more companies moved to the cloud and incorporate artificial intelligence into their operations. That and car sales will help offset the decline in gaming, Kress said. Data center revenue for the first quarter marked a record $3.75 billion, up 83% year over year. Gaming revenues in the first quarter were also a record $3.62 billion, up 31% year-over-year.

Revenue for the first quarter ended May 1 rose 46% to a record $8.29 billion. Excluding items, the company earned $1.36 per share, beating estimates of $1.29

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Reporting by Chavi Mehta in Bengaluru and Jane Lanhee Lee in Oakland, California; Editing by Matthew Lewis, Peter Henderson and Leslie Adler

Our Standards: The Thomson Reuters Trust Principles.

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