We see two reasons for Nvidia's dramatic price hikes on its newly unveiled graphics cards

Published Wed, Sep 21 20223:07 PM EDT

A top complaint coming out of this week's Nvidia GTC conference is sticker shock over the company's newly unveiled 40 series graphics processing units for video gamers and creators. Some of the online criticism suggests that pricing could give rival Advanced Micro Devices (AMD) a chance to win on the price-to-performance front. We'll get a look at AMD's latest offerings on Nov. 3. Others noted they will go for the now discounted Nvidia 30 series. Still, others who complained concluded that in the end, they will pony up in order to have whatever is the most cutting-edge GPUs on the market. As long-term believers and long-time holders of Nvidia (NVDA) in the Club portfolio, we see two reasons why the company would raise prices so dramatically on its new cards and risk playing into the hands of AMD, which is also a Club stock. For reference, the 4080 and 4090 series chips start at $899 and $1,599, respectively. At the lower-end, that's a 28% increase over 3080's launch price in September of 2020 of $699. At the higher-end, That's a more moderate 6.7% increase over 3090's launch price of $1,499. The first reason has to do with accounting for a decades-high inflationary environment, and the second reason has to do with using the price differential to flush out excess inventory of 30 series GPUs to make room for the next-generation cards based on the just-announced Ada Lovelace architecture, which start hitting the market next month. In Tuesday's interview with Jim Cramer, Nvidia CEO Jensen Huang tried to soothe investor angst about the video gaming market, which has lately dogged the company's shares. Inflation impact Starting with inflation, core consumer prices, excluding the food and energy sectors, are pointing to a roughly 10% increase in the cost of goods since 30 series units were released two years ago. Put another way, if we were to adjust for inflation, a comparable 40 series price tag (think 2020 dollars) would be about $770 for the 4080 and $1,650 for the 4090. So, the 4090 actually doesn't appear to be too bad of a hike, but the entry-level 4080 is way up versus what a simple inflation-adjusted price would suggest. Excess inventory That brings us to the second, more strategic, reason Nvidia may have opted to increase the price tag – the inventory glut of prior generation chips, something we spoke to on Wednesday's " Morning Meeting ." While those with the cash that demand the latest and greatest will no doubt go for the new 40 series chips, most gamers and creators may instead opt for the 30 series, which still offer great performance but are also now seeing steep discounts at retailers as Nvidia and channel partners look to flush out inventory ahead of the 40 series hitting shelves. For example, BestBuy is currently selling new GeForce RTX 3090 Ti chips for $1,099, down from $1,999 initially. So, in addition to adjusting for inflation, the pricing on the low end may also be a strategic way to flush out retail channel inventory ahead of the holiday selling season. Bottom line In the end, we think Nvidia's pricing is as much about clearing out inventory as it is inflation and think the higher sticker, while perhaps frustrating to consumers, is a good sign for shareholders as it should help us get through the inventory glut more quickly and speaks to higher revenue potential in the next up cycle. Moreover, we are not too concerned about overall demand at these higher prices because there will always be those ready to pay any price for the best of the best. In the end, if you want the most cutting-edge chips, one thing nobody can deny is the incredible performance boost of the 40 series versus prior generations. (Jim Cramer's Charitable Trust is long NVDA and AMD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Nvidia Corp CEO Jensen Huang holds one of the company's new RTX 4090 chips for computer gaming in this undated handout photo provided September 20, 2022.

Nvidia Corp | via Reuters