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Tuesday, August 9, 2022

Today's newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.

Crypto winter continues, and Nvidia (NVDA) is the latest company warning about the impacts to public markets.

On Monday, the chip giant offered preliminary results for its second quarter that were far short of Wall Street expectations, news that sent shares of the company down more than 6%. With this decline, Nvidia's market value dropped by $30 billion.

The specific challenge facing Nvidia is what the company expects will be a 44% quarter-over-quarter decline in revenue from its gaming segment, which which includes sales of high-end graphic cards and other chips. The drop nearly mirrors what the company suffered back in 2018 amid a previous crypto winter.

"Nvidia's gaming slowdown likely includes the chips they sell to the crypto market, which has been weak, hence the extent of the slowdown is so significant," J.P. Morgan analyst Sandeep Deshpande wrote in a note on Monday.

My colleague Dan Howley recently detailed the struggles revealed in results from companies like Microsoft (MSFT), Activision Blizzard (ATVI), and others in the gaming space. Basically, a mix of uninspiring titles, a chip shortage, and a post-pandemic slowdown are weighing on the sector.

But Nvidia's slowdown goes well beyond a moderation in interest from gamers building their own rigs with the latest graphics chips. As semiconductor expert Fabricated Knowledge wrote earlier this year, Ethereum's pending network transition from proof-of-work to proof-of-stake — aka the Merge — is expected to slow processor usage as well.

"The extent in which cryptocurrency mining contributed to Gaming demand is difficult for us to quantify with any reasonable degree of precision," Nvidia CFO Colette Kress noted during the company's first quarter earnings call. "The reduced pace of increase in [the] Ethereum network hash rate likely reflects lower mining activity on GPUs. We expect a diminishing contribution going forward."

In its latest 10-Q, Nvidia acknowledged these risks: "Changes to cryptocurrency standards and processes including, but not limited to, the pending Ethereum 2.0 standard may decrease the usage of GPUs for Ethereum mining as well as create increased aftermarket resales of our GPUs, impact retail prices for our GPUs, increase returns of our products in the distribution channel, and may reduce demand for our new GPUs."