Nvidia (NYSE: NVDA) stock is trading lower in early US price action today amid reports that Washington is considering a new set of restrictions on chip exports to China.
The country imposed restrictions on chip exports to China last year also but Nvidia managed to blunt the impact with sales of alternative products.
The Wall Street Journal first reported that the US Commerce Department is considering imposing restrictions on chip sales to China and the rules might be announced as early as the next month.
The US could restrict sales of AI chips to China
Last year, the US imposed restrictions on exports of several chips to China including Nvidia’s A100. The company however managed to circumvent the ban by selling A800 chips to China whose performance was below the limits that the Commerce Department had set.
Now it seems the US is looking at banning more chip exports to China including the A800 chip.
An apparent AI war is going on between the US and China and yesterday Chinese tech giant Baidu said that its Ernie chatbot beat ChatGPT on several parameters.
Several other Chinese companies including Alibaba are working on ChatGPT-like products. Alibaba has also restructured its business and combined the cloud and AI operations in one unit which is headed by the company’s former CEO Daniel Zhang.
Nvidia stock falls on fears of chip export restrictions
Nvidia gets almost a fifth of its revenues from China and the stock is trading lower today on fears of more chip export restrictions.
Recently the company joined the trillion-dollar market cap club amid euphoria towards its AI chip business.
It reported revenues of $7.19 billion in the fiscal first quarter of 2024– well ahead of the $6.52 billion that analysts were expecting. The adjusted EPS of $1.09 was also higher than the 99 cents that analysts were expecting.
Importantly, it guided for revenues of $11 billion in the current quarter which smashed the consensus estimate of $7.15 billion.
Nvidia stock soared almost 25% after the earnings release and Wall Street analysts scrambled to raise their target prices.
AI is a massive opportunity for Nvidia
The AI segment helped Nvidia post better-than-expected earnings. The company’s CEO Jensen Huang said “The computer industry is going through two simultaneous transitions — accelerated computing and generative AI.”
He is bullish on the company’s AI business and said, “A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”
The company’s CFO Colette Kress also echoed similar views and said, “Generative AI is driving exponential growth in compute requirements and a fast transition to NVIDIA accelerated computing, which is the most versatile, most energy-efficient, and the lowest TCO approach to train and deploy AI.”
She added, “Generative AI drove significant upside in demand for our products, creating opportunities and broad-based global growth across our markets.”
Rising US-China tensions are a risk for chipmakers
Rising US-China tensions are a risk for chipmakers that count China as a major market. Notably, chip stocks crashed in 2018 amid the escalation in the US-China trade war.
Former President Donald Trump imposed tariffs on most Chinese imports and also blamed China for the spread of the coronavirus.
US-China tensions have not come down in Biden’s tenure and if anything, they might have only increased.
Chinese economic growth has sagged
China was expected to lead the global economic growth this year after it relaxed COVID-19 restrictions last year. However, after the initial rebound, China’s economy is losing steam leaving brokerages scrambling to lower the country’s growth forecast.
Goldman Sachs became the latest brokerage to lower China’s 2023 GDP growth forecast from 6% to 5.4%.
Among other brokerages, Bank of America has made the steepest cut to China’s GDP projections and lowered its forecast from 6.3% to 5.7%. Standard Chartered lowered its forecast from 5.8% to 5.4% while UBS lowered its from 5.7% to 5.2%.
JPMorgan also lowered China’s 2023 growth forecast from 5.9% to 5.5% while Nomura – which is among the most bearish on the Chinese economy lowered its forecast from 5.5% to 5.1%.
Despite the slowdown, AI has been a bright spot as Chinese companies are investing to enhance their AI capabilities – which invariably means more business for companies like Nvidia.
However, as the AI/tech war between the world’s two largest economies intensifies, the US is also looking to contain China’s tech capabilities as is evident in the ban on sales of high-end Nvidia chips to China.
Analysts are divided on Nvidia valuation
Wall Street analysts are divided on Nvidia’s valuation after the humongous rally this year. While some see the stock’s valuation unjustified, UBS sees the stock as reasonably priced.
According to UBS analyst Timothy Arcuri, “From a valuation perspective, our EPS went up far more than the stock so we believe it is actually now less expensive than it was into earnings which opens up some more room to run.”
Notably, Nvidia’s revenue guidance for the fiscal second quarter was 50% higher than what Wall Street was expecting.
Baird said that it expects Nvidia’s annualized per-share earnings to reach $10 over the next few quarters which would mean a PE multiple of around 40 at current prices.
All said any further chip export restrictions by the US could only add to the ongoing tensions with China and dampen the outlook for names like Nvidia.
Would the US chip ban hurt China?
While a US chip export ban might play a dampener for China’s AI ambitions, the country might look at ways to overcome the ban.
According to Robert Lea, an analyst at Bloomberg Intelligence “Chinese AI firms may also be able to source dedicated AI chips from third party countries. So, I think it will be hard for US to enforce the regulations.”
Lea added, “While further restrictions could delay AI developments by Chinese firms, I don’t see a major long-term impact as Chinese firms take an increasingly innovative approach to workarounds.”
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