How the Crypto Collapse is Hurting Nvidia

While it is far from the only company to release disappointing third-quarter results, chip and graphics card manufacturer Nvidia Corp. (NVDA) represents an acute shift in the industry. According to  a report by CNBC, the chip maker saw its stock fall by nearly 20% from Thursday to Friday following the release of its fiscal third-quarter report. This marks an important chapter in the company's story after its fortune was made in part by intense demand over the past two years for graphics cards used to power cryptocurrency mining rigs. However, the digital currency industry of late-2018 is far removed from that of two years ago, let alone earlier this year. How has the decline of the cryptocurrency space in recent months contributed to Nvidia's trouble, and that of other chip makers?

First, it's important to note that Nvidia's reported revenue of $3.18 billion was shy of analyst expectations of $3.24 billion, while the earnings per share of $1.84 came in higher than the expected $1.71. Revenue guidance for the fiscal fourth quarter suggests that the company is expecting $2.70 billion in revenue, while CNBC reports the Refinitiv consensus estimate is $3.40 billion.

This is not the first quarter in which Nvidia failed to meet investor expectations. In the second quarter of the year, for instance, guidance levels were below expectations, even as earnings and revenue estimates exceeded. Part of the problem in that quarter was a decline in cryptocurrency mining products; unfortunately for Nvidia, this trend continued in the third quarter.

According to CNBC, graphics processing units (GPUs) like the ones made by Nvidia have become less profitable as a means of mining for digital currencies. In order to mine for digital tokens, computers compete with one another to solve difficult mathematical puzzles. When the prices of leading coins like bitcoin and ethereum fall, as they have since the beginning of the year, so too does the incentive for miners. After all, the costs associated with mining, including the equipment and electricity, can be significant.

In a press release accompanying the financial report, Nvidia Chief Executive Officer Jensen Huang indicated that "our near-term results reflect excess channel inventory post the cryptocurrency boom, which will be corrected." CNBC notes that the company saw a $57 million charge last quarter as a result of older products and relating to the waning demand for digital currency mining. The company's chief financial officer, Colette Kress, explained that Nvidia's "Q4 outlook for gaming reflects very little shipment in the midrange Pascal segment to allow channel inventory to normalize." Nvidia is not alone in having lost out as a result of the decline of digital currencies: competitors like Advanced Micro Devices Inc. (AMD) also posted losses in Q3.

As time goes on, it appears that the cryptocurrency boom of 2016 and 2017 may have been an isolated occurrence, rather than a wholesale and revolutionary shift to the broader financial and computing worlds. As such, Nvidia can no longer rely on intense demand for its cryptocurrency-related products to continue to drive revenue quarter after quarter. Fortunately, Huang suggests that the company is diversifying its offerings into other areas, even as it aims to adjust its practices to account for the changes to the digital currency space.

Huang noted that the company's "market position and growth opportunities are stronger than ever" and that Q3 saw Nvidia launch "new platforms to extend our architecture into new growth markets—RAPIDS for machine learning, RTX Server for film rendering, and the T4 Cloud GPU for hyperscale and cloud."