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‘Crypto hangover’ hammers Nvidia’s outlook, shares drop 17 %

(Reuters) – Chip designer Nvidia Corp <NVDA.O> on Thursday forecast disappointing sales to the holiday quarter, pinning the culprit on unsold chips turning up with distributors and retailers as soon as the evaporation from the cryptocurrency mining boom.

The Santa Clara, California-based company also posted sales that missed expectations due to its third quarter. Shares plunged nearly 17 % at the end of trading to $168.32.

For decades, Nvidia has supplied gaming cards to further improve computer graphics, playing with the past few years cryptocurrency miners adopted the company’s cards to transform bits into wealth.

Chief Executive Jensen Huang said prices for Nvidia’s gaming cards had risen while using cryptocurrency frenzy, driving some buyers away. Because frenzy receded and card prices dropped, Nvidia expected sales volumes to build again as clients who were priced out went back.

But that process was slower than Nvidia expected, Huang said, saying he expects inventories to become at normal levels after the actual quarter.

“The crypto hangover lasted above we expected,” Huang said with a conference call. “We thought there were done a more satisfactory job handling the cryptocurrency dynamics,” he later added.

As an end result, Nvidia stopped shipping many of its mid-priced chips to retailers, where they’re stacking in warehouses plus the backs of stores. The company said its provision for inventories expanded a lot more than five-fold inside fiscal third quarter to $70 million, and the a similar provision had a lot more than tripled for the first nine months of its fiscal year to $124 million.

The provisions for inventory lowered Nvidia’s gross margins by 1.8 percentage points during the quarter to 60.4 percent, though margins were up from 59.5 % 2009. Margins were also held down by $57 million in charges regarding its previous generations of chips after the sharp fall-off in cryptocurrency mining demand.

Nvidia also declared its revenue created from laptop computer makers decreased by almost 40 % as a consequence of lower demand for GPU products focused on easily use in cryptocurrency mining.

Nvidia stated it expected current-quarter revenue of $2.7 billion, plus or minus 2 percent, well below analysts’ average estimate of $3.40 billion, based on IBES data from Refinitiv.

Kinngai Chan, analyst at Summit Insights Group, said the condition was that inventories of Nvidia’s older gaming chips, based on a technology it calls Pascal, were piling up as demand for new chips released in August was weaker than expected. Chan also said demand was faltering for Nvidia’s chips in data centers, where they may be useful for artificial intelligence work such as teaching computers to realize images.

“But we too are amazed at the below-$3 billion outlook” to the fourth quarter, Chan said.

The trade conflict amongst the United states of america and China may also be weighing on Nvidia, analysts said. Tariffs on many Chinese-made goods will rise to 25 percent starting Jan. 1.

“Nvidia’s inventory build-up is suggesting the escalating tariffs have learned to pinch producers,” said Haris Anwar, analyst at Investing.com.

In the interview with Reuters, Huang said tariffs were “really not a factor” which the fallout on the cryptocurrency decline was really the only cause of the inventory build.

Last month, rival Advanced Micro Devices Inc <AMD.O> blamed dwindling demand for chips from cryptocurrency miners for the lower-than-expected fourth-quarter revenue forecast. AMD’s shares sank 7 percent after Nvidia posted results right after the market closed Thursday. Shares of chipmaker Micron Technology Inc <MU.O>, which sells memory to Nvidia to its gaming cards, sank 3.Three percent in late trading.

Revenue from Nvidia’s monitored data center chips business rose 58 percent to $792 million, but missed analysts’ estimate of $820.4 million, in accordance with FactSet.

The business powers cloud computing services of consumers including Amazon.com Inc’s <AMZN.O> Amazon Web Services, Microsoft Corp’s <MSFT.O> Azure as well as Alphabet Inc’s <GOOGL.O> Google Cloud.

During the investor call, analysts noted that joggers companies look like they’re slowing their overall spending on data centers. Huang told Reuters the fact that specific ways to use Nvidia’s chips which include machine learning were still expanding.

“Our overall penetration with the world’s data centers is relatively small,” Huang said. Nvidia’s net income rose to $1.23 billion, or $1.97 per share, inside the third-quarter ended Oct. 28, from $838 million, or $1.33 per share, last year.

Excluding items, Nvidia earned $1.84 per share, Total revenue rose 20.7 percent to $3.18 billion.

Analysts normally had expected revenue of $3.24 billion.

(Reporting by Munsif Vengattil in Bengaluru and Stephen Nellis in Bay area; Editing by Lisa Shumaker)

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