Nvidia Could Be Big Tech’s Next Casualty. Evidence Is Piling Up.

The company declined to comment.

Slowing business momentum would be a dramatic turn for America’s undisputed chip king. A series of strong results enabled Nvidia (ticker: NVDA) to surpass Intel (INTC) two years ago to become the most valuable U.S. chip maker. The stock gained 125% last year—the highest return for a large-cap technology company.

During the pandemic, Nvidia’s sales soared as the general public clamored to upgrade their in-home digital entertainment hardware, leading to chronic product shortages and resellers gouging consumers. For most of the past 18 months, Nvidia’s products sold out instantly whenever they were offered for sale.

But in recent weeks, the situation has shifted. Nvidia’s gaming cards are increasingly available on major electronics websites, including Microcenter, Newegg, and Amazon .
com. Some retailers are showing rising inventory levels and have even started to discount the cards, another clear sign demand is faltering. The weakness is showing up on reseller marketplaces too. According to the price-tracking website CamelCamelCamel, the third-party selling price of an Nvidia RTX 3080 Ti card has fallen roughly 40% this year.

A quick turnaround in demand isn’t plausible because the company’s prior aggressive pricing tactics are exacerbating the issue. While other consumer electronics companies such as Sony kept pricing stable for hot-selling products like the PlayStation 5 console, Nvidia decided to take advantage of the unprecedented demand.

The chipmaker regularly released incrementally improved cards at much higher prices. In September 2020, its flagship RTX 3080 was launched at $699, followed by the slightly better RTX 3080 Ti in June 2021, for $1,200 and up.

This strategy may come back to haunt Nvidia because demand at those high price points could disappear. Veteran industry analyst Jon Peddie says today’s pricing is unsustainable, predicting high-end graphics cards will return to the historical $500 to $700 level. “Consumers aren’t going to buy at a ridiculous $1,300 price,” he said during a phone interview.

Peddie notes gamers typically keep their cards for two to three years before upgrading. That could mean the strong pandemic-driven sales have pulled forward demand from future periods.

Then there is the crypto risk. For about a decade, digital currency miners have used graphics cards from Nvidia to produce new coins by doing computational work to validate transactions. Gaming cards have been well suited to mine ether, the second-largest cryptocurrency by market capitalization. And according to New Street Research, the vast majority of ether mining has been done using gaming graphics cards.

But that is going to change. In the coming months, the Ethereum blockchain network is expected to migrate from a “proof-of-work” model to “proof-of-stake,” negating the need for graphics card-based mining. The transition has been delayed from June, perhaps until the fall, but when it happens, miners will likely flood marketplaces with used Nvidia cards, creating an oversupply. It wouldn’t be the first time either. The crypto boom-and-bust cycle for graphics cards also occurred back in 2013 and in 2018.

What do these risks mean for shareholders? Since the beginning of the current Nvidia “Ampere” chip cycle that started in 2020, the company has consistently posted better-than-expected earnings and given financial guidance above analysts’ estimates. That type of outperformance could be a thing of the past.

If Nvidia doesn’t continue to generate surprisingly strong results, it would be a serious problem. The chipmaker trades at a pricey multiple of 38 times the per-share earnings expected for the next four quarters. The prospect of slowing growth, oversupply risks and high valuation is a recipe for disappointment.

While lower prices and more graphics card availability would be good news for gamers, caution is in order for investors. 

Write to Tae Kim at tae.kim@barrons.com