nvidia gaming

The price of NVIDIA stock is dropping nearly 8% lower today following the release of preliminary financial results for the second quarter of the company’s 2023 fiscal year. Sales are expected to fall significantly short of the management’s previous estimates for the period.

For the three months ended on 31 July, NVIDIA is now expecting to report revenues of $6.7 billion instead of the $8.1 billion the management had estimated for the quarter. The company cited that its gaming segment did not perform as expected due to “lower sell-in of Gaming products reflecting a reduction in channel partner sales likely due to macroeconomic headwinds”.

The gaming segment accounted for 43.6% of NVIDIA’s top-line results during the first quarter of the 2023 fiscal year and, therefore, its performance is crucial for the overall performance of the business.

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In addition, the management also stated that data center revenues also came in slightly below their expectations due to “supply chain disruptions”.

“As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory”, stated Jensen Huang, NVIDIA’s Chief Executive Officer.

The company will be taking several measures to deal with this challenging macro backdrop so its bottom-line performance is not dramatically affected. Among these, NVIDIA plans to slow the rate at which its operating expenses are growing while balancing its investments in the company’s future growth. However, the firm does not plan to pause its stock buybacks as its cash-flow generation capacity reportedly remains “strong”.

NVIDIA’s Gross Margins Take a Hit in Q2 2023

nvidia stock price chart
NVIDIA (NVDA) price chart – Source: TradingView

The profitability of NVIDIA is also expected to take a dramatic hit during this quarter as GAAP profit margins are expected to land at 43.7% compared to the 65.1% the firm had forecasted for the period only a few months ago.

However, its overhead will remain roughly unchanged compared to the management’s initial estimates with GAAP operating expenses being expected to land at $2.42 billion. Based on these forecasts, the firm would generate $2.92 billion in GAAP gross profits and roughly $500 million in GAAP operating profits. This would result in a 73.2% decline in the firm’s operating performance.

In addition, by using the data provided in the press release, the company’s GAAP net income may land at around $642.6 million resulting in a 60.3% year-on-year drop in its bottom-line profitability.

NVIDIA is expected to report its definite financial results for this quarter on 24 August.

The Market’s Reaction Indicates That the Mid-Term Outlook is Shifting

Today’s sharp downtick in the price of NVIDIA stock is indicating that market participants are revising their projections for the company downwards for the following quarters as the macroeconomic situation is affecting the firm to an extent that appears to be greater than expected.

That said, not everyone was surprised by the company’s downward revision. Analyst Abhinav Davuluri from Morningstar stated: “We had been anticipating a slowdown in the gaming segment following the crash in cryptocurrency prices and associated mining demand as well as weaker macroeconomic conditions, and we previously had gaming sales sequentially declining for the remainder of 2022”.

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In addition, analysts from Hargreaves Lansdown cautioned investors about a slowdown in gaming sales as well after the company reported its earnings for the first quarter of the 2023 fiscal year.

Back then, the British investment firm stated: “The gaming boom of recent times is serving NVIDIA well – although the rate of growth is slowing. The other bump in the road comes from lockdowns in China which has caused well-documented issues across the globe. None of these issues are deal breakers but could increase the risk of ups and downs for now”.

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