Why Nvidia Stock Slumped on Monday

What happened

Shares of Nvidia (NVDA -8.89%) tumbled on Monday, falling as much as 8.6%. As of 10:29 a.m. ET, the stock was still down 5.1%.

The catalyst that sent the semiconductor specialist lower was its preliminary financial results, which were far worse than the company had predicted.

So what

For the 2023 fiscal second quarter (ended July 31) Nvidia is now expecting revenue of roughly $6.7 billion, up 3% year over year and down 19% sequentially. This was far below its previous guidance of $8.1 billion. The shortfall compared to its expectations was primarily the result of weakness in demand for gaming processors. Gaming revenue is expected to be $2.04 billion, down 33% year over year and 44% sequentially.

Nvidia cited weakening demand for its gaming processors by its channel partners and resellers, noting that the lower sales were likely the result of “macroeconomic headwinds.” To counter these challenges, Nvidia “implemented pricing programs” (read: cut prices), and noted that these challenging market conditions are expected to persist into the third quarter.

At the same time, Nvidia’s data center revenue turned in a robust performance, generating revenue of $3.81 billion, up 61% year over year, and up 1% quarter over quarter. Management noted that while the data center segment still generated record revenue, it was somewhat lower than the company’s lofty expectations.

Now what

As a result of its economic outlook, Nvidia expects to take a charge of roughly $1.32 billion in the second quarter, “primarily for inventory and related reserves, based on revised expectations of future demand.” CFO Colette Kress noted that the charges were the byproduct of “long-term purchase commitments” the company made at the height of supply chain disruptions and “severe component shortages,” as well as the company’s “current expectation of ongoing macroeconomic uncertainty.”

While this quarter’s preliminary performance is certainly disappointing for investors, it’s important to put this in the context of the massive long-term opportunity. In response to the shortfall, management is reining in operating expenses but plans to continue share repurchases as it foresees “strong cash flow generation and future growth.”

Nothing to see here, folks. Move along.

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