Nvidia (NASDAQ:NVDA) stock is suffering a heavy 7% loss this afternoon. The company has earned a sterling reputation for its graphics processing units (GPUs) geared toward advanced video game experiences and crypto mining. After disclosing disappointing preliminary results for the second quarter, however, Wall Street now has serious misgivings about NVDA stock.
Management will discuss Nvidia’s latest financial results and outlook on Aug. 24. For the upcoming Q2 report, the company anticipates revenue of $6.7 billion. This figure is a lift from $6.5 billion in the year-ago quarter. However, it’s also well below the $8.1 billion analysts had previously targeted, a discrepancy of more than 17%.
Breaking down specific revenue channels, Nvidia expects to report $2.04 billion in gaming-related sales, down 44% sequentially from Q1 as well as down 33% year-over-year (YOY). Adding insult to injury, Q2 gaming revenue is set to miss the $3.04 billion consensus estimate.
Even Nvidia’s data center unit — which has historically been a bright spot — is raising eyebrows. Management expects the company to deliver data center sales of $3.81 billion, up 1% sequentially and a blistering 61% YOY. However, that sales estimate is below the analyst consensus target of $3.99 billion.
Now, NVDA stock is tumbling amid a challenging environment for discretionary purchases. Here’s what investors should know moving forward.
NVDA Stock and the Brewing Storm Clouds
Recognizing harsh realities may be the theme for both NVDA stock and the broader tech space. Nvidia CEO Jensen Huang said the following in a release:
“Our gaming product sell-through projections declined significantly as the quarter progressed […] As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our gaming partners to adjust channel prices and inventory.”
Part of the challenge for deciphering Nvidia’s negative disclosure is the ambiguity of bearish projections. Jordan Klein — a Mizuho analyst “associated with the company’s sales team and not its research arm” — said the announcement prompts questions about “whether this signals a kitchen-sink clearing event or if gaming stays worse for longer and data center might come under pressure down the road.”
Adding to anxieties for NVDA stock, management expects “challenging market conditions” to continue in Q3. That’s not a terribly surprising disclosure, considering the fact that the consumer price index increased 9.1% over the 12 months ended June 30. With the energy sector soaking up a gargantuan amount of consumer dollars, fewer discretionary funds exist for purchases like GPUs.
In addition, the July jobs report shot up well above expectations. While positive on that front, this also translates to higher wage growth. That means ever-rising inflation, a sign that the Federal Reserve needs to take even more aggressive action against escalating costs. In turn, this dynamic will likely have negative implications for the risk-on virtual currency sector, thus negatively impacting Nvidia’s crypto-related business.
Video Games in Focus
As if stakeholders of NVDA stock needed more bad news, video game companies like Microsoft (NASDAQ:MSFT) and Nintendo (OTCMKTS:NTDOY) recently posted disappointing results. The culprit? In part, revenge travel. Having been cooped up at home for roughly two years, consumers grew tired of digital entertainment. Instead, they gravitated toward actual experience-based services, which left many pandemic winners out in the cold.
Until Nvidia and its ilk can figure out how to bring people back into their homes and to their products, this challenging ecosystem may persist.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.