How Bad Is Nvidia’s Gaming Business Slowdown?

Graphics processing chip maker NVIDIA (NASDAQ:NVDA) is back in growth mode -- at least when using a sequential quarter-over-quarter measurement. Revenues increased just shy of 1% in the first quarter of the 2020 fiscal year (the three months ended April 28, 2019) compared with the fourth quarter, and adjusted earnings per share were up 10%.

The year-over-year picture still looks pretty ugly, though. Revenue and adjusted earnings were down 31% and 57%, respectively, compared to the same quarter the year prior. After losing sales from the cryptocurrency bubble and then suffering from a subsequent oversupply in video game graphics cards, NVIDIA has a long way to go to claw its way back to its all-time high sales and profits records. A rebound in the video gaming segment -- or lack thereof -- will be the difference maker.

The quarterly trend

NVIDIA is much more than a video gaming business. After years of development in graphics technology, the company now powers all sorts of computing processes from data centers to automotive safety systems and self-driving capabilities. Still, gaming is the lion's share of the overall business, making up 48% of total sales in the last quarter. However, some of NVIDIA's other segments are catching up; gaming made up 53% of the business during the 2019 fiscal year.

Nevertheless, part of the reason video games are accounting for less of the revenue is the steep tumble the segment has taken as of late as NVIDIA slashed prices to work through an excess of inventory after the aforementioned cryptocurrency bubble popped early last year. The end of the cryptocurrency craze shows up in both the "gaming" segment and the "OEM and other" segment.

What's next?

While there are signs of growth once again, the hardware maker has a lot of ground to make up. The company's pending takeover of networking specialist Mellanox (NASDAQ:MLNX) should help prop up the stalling data center segment -- first-quarter sales at Mellanox were up 22% year over year. But the soon-to-be-subsidiary's revenue of $305 million still means the data center business will play second fiddle to the video game segment at NVIDIA -- at least for the time being.

The good news is that management thinks demand for its graphics cards to power the next generation of video games (featuring AI-powered ray tracing for near-real-life images) will continue to improve sequentially. Leading the way are sales of laptops optimized for gamers; NVIDIA said it is selling a record number of laptops with its graphics processors inside and expects that to continue. Second-quarter revenues are forecast to be $2.55 billion at the midpoint -- a 20% year-over-year decline but a respectable sequential increase of 16%.

Then there's the bad news: There will be no more full-year guidance. NVIDIA joins many other companies that steer clear of providing a longer-term outlook on specific numbers, but with the stock especially volatile as of late, the changing of gears now could mean that wild up-and-down trend will continue. Nevertheless, the gaming business is growing again on both the top and bottom lines. With the majority of sales coming from that segment, things are looking up at NVIDIA.

Nicholas Rossolillo and his clients own shares of NVIDIA. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool has a disclosure policy.

This article originally appeared in The Motley Fool.