Nvidia said in a statement late Wednesday that operating income for the third quarter would be about $5.9 billion. That compares to well below the average analyst estimate of $6.92 billion, with a gross margin of about 65%.

According to Bloomberg analysis, Nvidia said half a month ago that sales in the latest quarter would be much lower than initially expected. The company believes the main problem it faces in the market is declining demand for chips used in gaming computers.

Shares of Nvidia fell more than 4.7% in extended trading following the announcement. The stock has fallen 41% so far this year, making it one of the worst performers on the Philadelphia Stock Exchange Semiconductor Index.

"We will sell much less graphics cards to the market than the market buys to reduce inventory, and we should hit that target by the end of this year," CEO Jensen Huang said in an interview on Wednesday.

Nvidia's data center chip sales hit an all-time high last quarter, but they still missed expectations. The company struggled to acquire enough upstream components, including power converters and transceivers, to produce as many data center products as possible, which had some headwinds on sales.

Overall, the drop in demand in the market started around June and happened too quickly for companies to respond in time. That leaves Nvidia and its distributors with high GPU inventories, he said.

Nvidia has been an important growth engine for the semiconductor industry in recent years, outpacing other chipmakers. But right now, like many of their outsourced manufacturing peers, Nvidia is in the transition from a supply shortage to high inventories.

Nvidia is now burdened with large up-front payments for materials and product manufacturing at a time when its own demand is falling while its internal inventory of finished chips is building.

Inventory was $3.89 billion in the most recent quarter, up from $2.11 billion a year earlier. Total inventory purchases and long-term supply obligations were $9.22 billion, nearly double what they were a year ago. Nvidia said $3.14 billion was prepaid for the supply agreement.

Nvidia said its gaming business revenue in the second quarter fell 44% from the previous quarter and 33% from a year earlier to $2.04 billion.

Nvidia's previous rise to the top of the U.S. chip industry by market valuation was driven by the explosive growth of its data center business. Owners of large cloud data centers are increasingly using their GPUs for AI computing. While the segment's revenue rose 61% to $3.81 billion, it still fell short of Nvidia's expectations, the company said. Results were "affected by supply chain disruptions".