Home Cryptocurrency Why Is NVIDIA’s Gross Margin Contracting?

Why Is NVIDIA’s Gross Margin Contracting?

NVIDIA’s high inventory levels

NVIDIA (NVDA) is struggling with diminishing demand from cryptocurrency miners, which has added to its midrange channel inventory and has dented its revenue and earnings significantly.

NVIDIA’s gaming card prices, which rose during the cryptocurrency boom, crashed with the downturn in crypto demand. Its sales plummeted, and its inventory kept piling up. US-China (MCHI) (FXI) trade tensions also dented demand for NVIDIA’s gaming GPUs (graphics processing unit).

nvidia operating expense ratio

Gross margin

In the fourth quarter, NVIDIA reported a gross margin of 56%, down 610 basis points from the previous year’s 62.1% and down 500 basis points from the previous quarter’s 61%. On January 28, NVIDIA slashed its fourth-quarter gross margin expectation from 62.5% plus or minus 50 basis points to 56% plus or minus 100 basis points due to charges of ~$120 million related to excess dynamic random-access memory and other components. Lower revenue and a higher provision for inventory are also denting NVIDIA’s gross margin. It expects its adjusted gross margin to be 59% plus or minus 50 basis points in the first quarter of fiscal 2020. Analysts expect its gross margin to be 58.84% in the first quarter of 2020.

Higher operating expenses

NVIDIA has been spending on research and development expenses as it explores new applications for AI technology. In the fourth quarter, NVIDIA announced the availability of its GeForce RTX 2060 gaming GPU, which is based on its Turing architecture, for PC gaming. In January, NVIDIA rolled out more than 40 gaming laptops powered by its GeForce RTX GPUs. Within the data center space, the company launched its T4 GPU in public beta on Alphabet’s (GOOGL) Google Cloud platform. It will be available in the United States, Europe, Brazil, India, Japan, and Singapore.

These investments increased the company’s non-generally accepted accounting principles operating expenses by 24% YoY to $755 million in the fourth quarter. Its operating expense ratio stood at 34.2% in the quarter. It expects its operating expenses to reach $755 million in the first quarter of 2020, flat compared to the previous quarter.

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