It was a rollercoaster ride for NVIDIA (NASDAQ: NVDA) in 2018. The towering graphics chip specialist was unstoppable in PC games and datacenter business, thanks to the company's massive growth. The tragedy, however, occurred in mid-November, when the chip maker announced that its growth would hit a wall.
The Root of the Problem
NVIDIA sales growth is expected to be in the single-digit range this quarter. The reason: weak demand for graphics cards. Cryptocurrency mining was an important catalyst for the sale and pricing of graphics cards. Miners flocked GPUs (Graphical Processing Units) in droves as the elimination of digital currencies such as Bitcoin was profitable, leading to a supply shortage that led to a massive price hike.
But the advent of specialized mining chips and the shrinking benefits of cryptocurrency mining means that GPU demand from cryptocurrency mining has declined. This has led to excessive GPU inventory in the marketplace. Not surprisingly, graphic card prices have dropped significantly since the beginning of the year, leading to a decline in NVIDIA cash flow.
The graph above shows a correlation between the price of the NVIDIA flagship GTX 1
But the price of NVIDIA The flagship GPU has since dropped, and this seems to affect the cash flow profile. There is no doubt that NVIDIA sells many GPUs besides the GTX 1080 Ti. However, I focus on this particular product because it is a high-end offering, which means it should be in high demand from miners and players alike. That's probably why the price dropped so much when miners were taken out of the equation.
It is also reported that cryptocurrency miners are selling their used graphics cards, bringing more inventory to the market and hurting prices. The bad news is that this overstocking also seems to affect NVIDIA's new GPUs. The latest RTX 2080 graphics card was available as part of Black Friday and Cyber Monday offers for a $ 150 discount on the $ 900 price tag. This is a big discount for a card that has only been on the market for two months.
It is likely that NVIDIA's cash flow profile will continue to hit as the flooding continues for several quarters. 19659003] What next?
The good news is that despite the recent setbacks, NVIDIA generated nearly $ 2.5 billion in free cash flow in the first nine months of the current fiscal year, compared to just under $ 2 billion a year over the same period ,
The company wants to capitalize on the additional cash flow it has created thanks to the cryptocatalyst for investor confidence. It recently increased its dividend by 7% and approved a $ 7 billion share repurchase program. Well, the dividend increase will not do much, as the dividend yield of NVIDIA after the increase is only 0.44%.
The company was very, very conservative when it came to raising the dividend despite the massive increase in revenue and cash flow growth over the years. If NVIDIA had wanted to, it would have been able to triple the dividend without sweating, and there was still enough money to invest in other activities or even reduce debt.
NVIDIA, however, has decided to increase the share repurchase program, which could enable it to repurchase almost 8% of its total outstanding shares at its current market capitalization. Of course, the company wants to support its profits by reducing the number of shares, but at the same time the scope for a substantial increase in the dividend is not included in the equation.
Also, NVIDIA's quarterly free cash flow has now dropped
So investors should not expect that NVIDIA's cash flow will rise to the dizzying heights of the past year. However, the company's cash flow performance could improve provided the technology benefits of the data center and PC gaming chips are well received by customers.
NVIDIA is packing new technologies into its 20 Series GP series, which the rival Advanced Micro Devices still does not offer, while it wants to make progress with its dissipative GPUs in the field of artificial intelligence. Assuming that these customer innovations are a hit, NVIDIA can regain its pricing power and rebuild its cash flow profile. Until then, NVIDIA investors must remain patient as they will experience turbulent times in the short term.