The Biden Administration has reinforced measures to curb the semiconductor exports of U.S. chipmakers to China, effectively plugging regulatory loopholes identified last year.
This move enhances the stipulations set forth by the U.S. Commerce Department, which unveiled stringent export control rules that were first established in October 2022. The revised regulations will block some AI chips beneath the existing technical parameters. Additionally, companies will now be required to declare shipments of certain other products. These fresh limitations will bolster the effectiveness of American controls and limit ways to circumvent these restrictions further.
This prohibition is part of a broad legal and financial policy strategy to promote U.S. national security, especially considering heightened competition with China. These unprecedented measures are intended to constrain Beijing’s technological and military ambitions. The initiative seeks to halt supplies of critical technology to China that could be utilized across various sectors, including advanced computing and the production of weaponry.
These heightened restrictions on tech exports to China coincide with American efforts to ease strained relations between the two largest global economies. This shift in policy toward China heralds a significant turn in U.S.-China tech diplomacy.
Last year, government restrictions prevented the Santa Clara, California-based chipmaker NVIDIA Corporation (NVDA) from shipping two of its most technologically advanced AI chips to Chinese customers – chips recognized as an industry-standard in developing chatbots and similar AI systems.
However, NVDA quickly adapted by releasing new, less sophisticated variants for the Chinese market that complied with U.S. export controls. They created the H800 semiconductor chip to replace the previously banned H100 for China, along with the development of the A800 to replace the A100 for Chinese firms. The H800 boasts comparable computing power to the company's more potent H100 chip in specific AI capacities, albeit with some performance limitations.
However, according to NVDA’s recent SEC filing , these restrictions apply to several of the company's chips, including the A100, A800, H100, H800, L40, L40S, and RTX 4090. This affects all systems sold with these chips, including their DGX and HGX systems.
Previously, in June, NVDA's CFO Colette Kress downplayed the impact of the potential export restrictions, asserting that they would not yield an “immediate financial impact” but that subsequent limitations, unexpected at the time, “would have an immediate material impact on our financial results .”
The U.S. chipmaker is at risk of losing $5 billion worth of orders from China due to the chip export ban. The orders were placed for 2024 by leading Chinese tech giants such as Alibaba, ByteDance, and Baidu. Before the imposition of the ban, NVDA expected to begin fulfilling some of these orders by November 15, the initial cut-off date for blocking shipments of advanced AI chips to China. Unless the U.S. government issues the required licenses necessary to make the deliveries, NVDA may have to cancel the lucrative orders.
Despite looming challenges, NVDA has consistently exceeded Wall Street's expectations with its strong earnings performance over the previous two quarters. This success is primarily attributed to the surge in demand for computer chips that power the ongoing AI revolution. Analysts had collectively forecasted earnings per share of $2.07 and sales of $11.09 billion for the last reported quarter. However, NVDA surpassed these estimates by posting earnings of $2.70 per share and sales of $13.51 billion.
Strategic collaborations between countries are anticipated to spur AI adoption worldwide. Tech companies of varied sizes are earmarking substantial investments in AI data centers to stay competitive. Latest projections suggest that the market for AI semiconductors will grow at a 30.3% CAGR to reach $165 billion by 2030. This surge in demand could favor NVDA owing to its current dominance in the AI chip industry.
To maintain its competitive edge, NVDA persistently advances its technological offerings like its recent GH200 Grace Hopper Superchip GH200 Grace Hopper Superchip platform. The new chip platform, engineered explicitly for certain AI applications, including LLM and generative AI, could keep the company one step ahead of its rivals in the AI chip market.
Furthermore, NVDA accentuated an already robust quarterly report with a projected revenue of approximately $16 billion for the upcoming quarter, surpassing average analyst forecasts. However, concerns regarding export regulations imposed on China could jeopardize the company's continued streak of success.
For the fiscal third quarter ending October 2023, analysts expect NVDA’s revenue and EPS to increase 169.6% and 481.3% year-over-year to $15.99 billion and $3.37, respectively.
One of the significant contributors to this year's 23% increase in the Nasdaq index is NVDA stock, which is currently experiencing a nearly 16% decline from its record peak closing value of $493.55, achieved on August 31.
Following the recent implementation of U.S. regulations, NVDA's share price saw about a 5% decrease. It trades beneath its 50-day and 100-day moving averages, respectively, indicating a downtrend.
However, Wall Street analysts expect the stock to reach $645.53 in the next 12 months, indicating a potential upside of 55.8% . The price target ranges from a low of $560 to a high of $1,100.
Bottom Line
Earlier this year, NVDA earned a coveted spot in the $1 trillion club following an impressive surge in its revenue guidance due to substantial order volume from the burgeoning generative AI industry. Notably, its stock has recorded a remarkable 180% increase year-to-date, an extraordinary achievement for an enterprise of its size.
This soaring valuation can be chiefly attributed to the enthusiasm surrounding NVDA’s high-performance chip technology – currently in high demand due to the growing focus on AI and ML capabilities being deemed essential by several industries.
With NVDA's shares trading at 19 times sales and 38 times earnings, it is certainly priced for perfection, signifying that any stumble could significantly affect it.
Despite the company's previous assertion that restrictions will unlikely cause short-term impact, now they appear to have the potential for long-term consequences. A projected robust quarter suggests NVDA shares could prove a solid long-term investment.
However, given the ongoing market instability, tepid price momentum and varying analyst estimates, it may be prudent to wait for a better entry point in the stock.
NVDA is preparing to announce its financial results for the forthcoming quarter within a few weeks. This report will help better assess the impact of the export restrictions on the company’s financials.
