Nvidia, a leading force in artificial intelligence chip manufacturing (NVDA.O), is on the verge of unveiling another robust revenue forecast on Tuesday. However, the spotlight has shifted towards the potential repercussions of heightened U.S. restrictions on the sale of its premium chips to China.
The AI-Driven Surge and Market Impact
This financial report serves as a litmus test for the AI-induced surge that has propelled the U.S. stock market, witnessing a nearly 50% uptick in 2023 for the Philadelphia Semiconductor Index (.SOX). Kyle Rodda, an analyst at Capital.com, underscored the pervasive assumption of Nvidia’s market supremacy and its consequential impact on investor sentiment. Rodda noted, “Anything that influences that perception, whether due to business performance or risks to specific markets, will moderate enthusiasm.”
In the last month, the Biden administration imposed a ban on China’s acquisition of Nvidia’s H800 and A800 chips, a consequence of preceding export restrictions to the country. China, constituting over one-fifth of Nvidia’s revenue, ranks as the company’s third-largest market. Despite Nvidia’s reassurance of no immediate repercussions from the restrictions, concerns escalated in October, causing the stock to hit a nearly five-month low. A report from the Wall Street Journal hinted at potential risks to up to $5 billion in Chinese orders.
Following a remarkable rally earlier in the year, propelling Nvidia to become the first trillion-dollar chip firm, the stock experienced a dip of over 12% between August and October, mirroring growing investor skepticism amid escalating China-related concerns. Nvidia currently boasts a trading multiple of 31 times its 12-month forward earnings estimates, contrasting with rival AMD’s price-to-earnings ratio of 33.
China’s Impact on Nvidia’s Chips
Before the recent export curbs to China, the demand for Nvidia’s H800 chip, a scaled-down version of its flagship AI chip, outpaced competitors due to its superior performance. Analysts speculate that Nvidia has developed three new chips tailored for the Chinese market, poised for imminent release. Stacy Rasgon, an analyst at Bernstein, shed light on the control measures’ impact on performance, stating, “While the previous workarounds required minimal adjustments to the memory bandwidth, this time around, the controls necessitate a significant reduction in overall performance.” However, Rasgon opines that these chips could still be appealing to Chinese customers while garnering more acceptance from U.S. regulators.
Nvidia is anticipated to disclose a staggering 173% surge in revenue for the third quarter, with Wall Street projections indicating a forecast of over 195% growth for the current quarter. The company has introduced a cutting-edge AI chip named the H200, featuring enhanced bandwidth memory. This launch aims to fortify Nvidia’s competitive position against AMD, especially in anticipation of the impending MI300 chip.
Leading cloud service providers, including Amazon Web Services, Google Cloud, Microsoft Azure, and Oracle Cloud Infrastructure, alongside specialized AI cloud providers CoreWeave, Lambda, and Vultr, are poised to provide access to H200 chips.
Morningstar analysts posit that Nvidia’s substantial growth may eventually mitigate the significance of revenue from China over time.
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