Nvidia stock keeps dropping, and there are plenty of theories about why. But one thing we know for sure is that there is no correct answer to the question, “Why is Nvidia stock dropping so much?”
But while many analysts believe the recent decline is simply due to investor concerns over the coronavirus outbreak, others say it might be part of a well-timed strategy to release news ahead of earnings this month.
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For example, since Nvidia makes most of its money from selling chips to companies like Apple, Amazon, and Facebook, it could mean reducing sales growth.
There are many reasons why Nvidia stock could be dropping, so let’s explore a few to understand the question better.
GPU Sales to Crypto Miners
Nvidia’s GPUs (graphics processing units) experienced an explosion in market demand in 2017 and the subsequent years. This growth came even though Nvidia had just introduced its CMP line designed specifically for crypto mining. In 2018, however, Nvidia’s gaming GPU sales declined sharply.
Reports emerged that Nvidia was selling its high-end graphics cards to crypto miners. On May 15, 2022, Nvidia announced that it had agreed to pay $5.5 million to settle charges brought against it by the Securities and Exchange Commission (SEC). The SEC alleged that Nvidia misled investors about the extent of the impact that crypto mining had on its revenue.
In August 2018, Nvidia reported that its third-quarter earnings fell short of expectations. Its gaming division suffered a decline in both revenue and profit. The company blamed the drop in gaming revenue on “crypto-related headwinds.”
On April 30, 2019, Nvidia reported its fourth-quarter earnings. Revenue increased 21% over Q3 2018. However, profits dropped by 40%. The company attributed this decrease to lower margins due to currency exchange rates.
Another reason why is Nvidia stock so low is due to restrictions against China. The United States government is restricting the sale of high-performance computing chips to China as Nvidia’s AI chips could be used to make weapons.
A spokesperson for Nvidia stated the restrictions are meant to protect national security interests. They are applying to Russia, yet Nvidia has noted no exposure to the country.
In a recent SEC filing, Nvidia stated the following regarding the restriction:
The Company’s outlook for its Third Fiscal Quarter Provided On August 24, 2020 Included Approximately $400 Million in Potential Sales to China Which May Be Subject To The New License Requirement If Customers Do Not Want To Purchase The Company’s Alternative Product Offerings Or If The USG Does Not Grant Licenses In A Timely Manner Or Denies Licenses To Significant Customers.Nvidia
Nvidia has currently filed for an exemption. A further clarification states that Nvidia may use its Hong Kong facilities to continue designing the H100 chip in China until September 1, 2023.
Nvidia Stock Gets Downgraded
Nvidia shares fell nearly 3% following a downgraded outlook from Baird Equity Research. The firm’s analyst, Tristan Gerra, cut its rating on the stock to neutral from outperform, citing concerns over consumer GPU order cancellations, surplus inventories, a downturn in demand for PCs and consumers, and the sanctions against Russia.
“While Nvidia sells at MSRP, pricing declines in GPUs post a pricing peak mid last year reflect on weakening demand, to the point where orders are now being impacted. Importantly Nvidia is not cutting wafer/substrate orders so far, as Nvidia has been supply restricted for the past 1.5 years and as data center demand remains very strong.”Tristan Gerra
Nvidia’s stock now has a $225.00 price target, down from a previous $360.00.
Nvidia Faces Competition
Nvidia faces competition from other players in different sectors of the market. In particular, AMD, whose graphics chips are used in gaming PCs, could bring more competition in the GPU segment. This could pressure Nvidia’s market position in terms of revenue and margins.
On the other hand, ARM-based application processors may compete in an effort to overtake Nvidia’s dominance in dual-core technologies. These chips are being developed to power smartphones and tablets.
AMD and Nvidia produce the best graphics cards for gaming PCs. Nvidia’s RTX 40-series and AMD’s RX 7000 GPUs will compete against each other in 2022.
In addition, Intel presented its new IDM 2.0 Hybrid Manufacturing Strategy in April 2021. Intel can produce more cutting-edge products and maintain its position as a market leader with IDM 2.0. In January 2021, Intel held a 66% market share for x86 CPUs. With a capitalization of $218.83 billion, Intel is one of the most formidable Nvidia competitors.
Nvidia’s Opportunity in the Automotive Industry
With over 50 global customers, including nearly every major automaker, Nvidia is well-positioned to take advantage of the growth in autonomous driving. In fact, it already has a strong position in the market with its leading-edge GPU products used by many automakers to power self-driving vehicles.
The company’s automotive strategy is quite clear; it wants to become the number one supplier of GPUs for cars. To do that, Nvidia must address three key challenges:
- Defining the future role of GPUs in automotive applications
- Delivering high-performance computing solutions for self-driving vehicles
- Building a portfolio of automotive chips
As part of the second challenge, Nvidia has developed a new architecture called “Thor,” which promises to offer 10x improvements in compute density versus the current NVLink technology. This could enable Nvidia to provide much faster processing speeds for deep learning algorithms, which are critical for self-driving vehicle development.
In addition to the computational demands of self-driving vehicles, there are several other reasons why Nvidia’s automotive business is poised to grow rapidly.
First, the company has developed a broad array of software tools to support the creation of self-driving vehicles. These include Autopilot Vision, Autopilot Drive PX, Autopilot Deep Learning System, and AutoML Vision Platform.
Second, Nvidia recently acquired Mellanox Technologies, which provides connectivity solutions for autonomous vehicles.
Third, the company has been investing heavily in R&D for autonomous vehicles, spending some $500 million annually on research and development.
Finally, the company has a solid track record for delivering on commitments to meet customer requirements.
To conclude on the question, “Why is Nvidia stock dropping so much,” we know that investors worry about slowing PC demand and increased competition from AMD. In addition, new U.S. trade sanctions against Chinese tech companies could hurt demand for Nvidia chips used in smartphones.
On a fundamental level, Nvidia is still poised for strong growth. The company is diversifying into new businesses, including artificial intelligence, autonomous vehicles, and blockchain technology. Those efforts could boost demand for Nvidia chips and help offset slower growth in the traditional graphics card market.