Two weeks ago, the US chip manufacturer Nvidia issued a sales warning for the second quarter. The poor forecast has come true, as the company announced on Wednesday evening in Santa Clara, California: Nvidia missed sales expectations for the past quarter by $1.4 billion and only converted $6.7 billion. For the current quarter, Nvidia CEO Jen-Hsun Huang (59) forecast sales of just $5.9 billion.
The chip company is suffering from the uncertainty and the downturn in the USA and worldwide. The numbers are a harbinger of what could lie ahead for the entire industry. The rapid growth of recent years will not continue despite the current shortage of chips – the pace is expected to slow down drastically from 2023.
At Nvidia, the chip stars from the USA, the gaming business, which was important in the previous year and is heavily dependent on the consumer mood, collapsed. CEO Huang had to complain about a minus of a third. Entertainment products and computer gaming hardware are among the first things households save on. In addition, the extraordinary gaming boom that began worldwide during the corona lockdowns is over. Gambling is less attractive without a lockdown.
While Nvidia still made $656 million in profit (up from $2.37 billion last year), the outlook for the next few quarters remains bleak. In the second quarter, Nvidia grew by 3 percent, but that can change quickly if the group doesn’t get its supply chain problems under control and the overall economic situation doesn’t improve. The share price has fallen by more than 40 percent since the beginning of the year, according to Wednesday’s figures it went down again by four percent at times.
And another dependency is now proving to be risky for the Americans. The falling bitcoin price is affecting the company. But not because Nvidia itself is invested in Bitcoin. Bitcoin miners all over the world use Nvidia’s high-performance processors for so-called mining. However, since not only Bitcoin but also many other cryptocurrencies have been in crisis, the demand for data centers for mining has decreased.
The seventh largest chip manufacturer is thus an example of an industry that has known only one direction for years: upwards. Semiconductor chips are a key technology for so many tasks that humanity has to master right now. Nowadays, no car drives, no factory and no power plant run without semiconductors. Malte Schaumann, an analyst at Warburg Research, calls the small chips an “enabling technology”. “Many innovations are only now being made possible by semiconductors,” he says. The switch to electromobility and energy-efficient solutions in almost every sector would be unthinkable without semiconductors.
Schaumann is therefore not assuming a structural slump. “This is clearly a growth market,” he says. Even a small recession-related dip would not buck the long-term trend.
Nevertheless, sales and profit warnings have been hailing in the industry for a short time. Sales of PCs and smartphones collapse worldwide. In the second quarter of 2022, PC manufacturers sold over 18 percent fewer devices than in the fourth quarter of 2021. This is slowing chip demand. An analysis by the investment house Jefferies last week also warned of imminent order cancellations from the automotive industry. “The profit warnings have only just begun,” the report said.
The expectations are correspondingly restrained. The organization World Semiconductor Trade Statistics (WSTS), a kind of association of chip manufacturers, published estimates of the development of the global market for semiconductors this week. This year the market will grow by 13.9 percent. For 2023, the organization only expects growth of 4.6 percent.
The Jefferies report warns that the Munich chip manufacturer Infineon could also become less comfortable. In fact, some car manufacturers and suppliers have ordered chip tranches several times, from different manufacturers. While there have been massive delivery bottlenecks for semiconductors in the past two years, the companies wanted to be sure of being supplied as quickly as possible. There could now be cancellations.
However, Infineon currently still has a huge backlog of orders. According to Warburg analyst Schaumann, the volume would correspond to about three times the annual sales of the semiconductor manufacturer. “Even if the order backlog were to be halved, Infineon would still be busy working through it for a long time,” says Schaumann. He also does not expect too many cancellations. The small chips also do not cause large storage costs. “One of the lessons of the last few years has been to expect higher inventories.”
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However, according to the analyst, Infineon is not completely immune to the effects of the recession. Because it is unclear how car production will develop and what influence the recession and the discussion about company car privileges will have on the industry. Above all, the decision to increase production capacity is associated with risks. In semiconductor production, three quarters of the costs are fixed, says the analyst. When a newly built factory stands still, the company can be costly.
Nvidia boss Huang and his people are expecting sales of just $5.9 billion for the current quarter. That would be a billion less than last year.