Nvidia says video gaming market slowing; shares drop 7%

Chip designer Nvidia Corp forecast its sales of video game chips would decline in the current quarter, and startled some analysts by laying out new supply-chain issues resulting from China's Covid-19 lockdowns.

Chief Executive Jensen Huang told Reuters that Nvidia's gaming business revenue will post a percentage drop in the mid-teens for the current quarter compared with the previous quarter.

"Overall the gaming market is slowing," Huang said. Based on the softer market demand, Nvidia has chosen to reduce what it sells into the China market, he said. Nvidia is also taking a hit from Russia and sees "slower sell-through" in Europe, he said.

Nvidia shares fell 6.7% in extended trading, even though the company's first-quarter revenues and earnings topped analyst estimates. The shares are down about 40% so far this year in tandem with a wider selloff in growth stocks over concerns of aggressive interest rate increases by the US Federal Reserve.

Concerns over inflation 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 on average expected $8.45 billion, according to IBES data from Refinitiv.

The lower revenue forecast included an estimated reduction of about $500 million relating to Russia and the Covid lockdowns in China. Chief Financial Officer Colette Kress saidthe $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 China's Covid lockdowns, in addition to affecting logistics, were hitting consumer spending.

Dan Morgan, senior portfolio manager at Synovus Trust, said it was puzzling that a company that navigated the supply hurdles so well up to now suddenly hit a bump in the road.

Kinngai Chan, analyst at Summit Insights Group, said almost every tech company that has missed on outlook has blamed the Russia-Ukraine conflict and China's Covid lockdowns. He expected Nvidia to face more downturns going forward.

One analyst was more optimistic.

"The pullback after hours is an overreaction to geopolitical events outside of the company's control, not a weakening demand environment," said Logan Purk, analyst at Edward Jones, noting the tumble in Nvidia's share price.

Weaker prices for graphics chips and lower discretionary spending amid high inflation are likely to pressure Nvidia's gaming business, according to experts.

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

Still, demand from data center clients remained strong as more firms shift to the cloud and incorporate artificial intelligence in their operations. That and automotive sales will help offset the decline in gaming, said Kress. Data center revenue for the first quarter marked a record $3.75 billion, up 83% year on year. Gaming revenue in the first quarter was also a record $3.62 billion, up 31% year on 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.