Nvidia
has impressed Wall Street with earnings for the past two quarters amid an increasingly upbeat outlook over demand for computer chips to power the artificial intelligence boom. But woes over export rules to China threaten to derail a three-peat.
Nvidia (ticker: NVDA), a key beneficiary of the investor frenzy over AI, has $5 billion in orders to China that are vulnerable to the latest U.S. rules over exports of critical technology, The Wall Street Journal reported on Tuesday, citing an anonymous source.
The Commerce Department said earlier this month that it was tightening rules announced in 2022 that target China’s access to AI and other advanced technologies. The latest rules focus on the most high-tech chips, like Nvidia’s, that are now banned for export without a license. Even sales to China of chips below that threshold require notifying the government, which could then ban individual sales.
Nvidia initially brushed off concerns that sales to China—which make up around 20% of revenue in its data center business, the heart of the company’s AI drive—would have a meaningful impact on financial results, citing strong global demand for its chips. But analysts are more cautious, especially about the longer term, citing the truly vast opportunity in the China market as a source of growth.
With the Journal reporting that new rules could compel Nvidia to cancel billions of dollars in orders to China next year, there may now be a number—$5 billion—to look at as a baseline hit to the company in 2024.
Analysts surveyed by FactSet expect Nvidia to post revenue of $81.3 billion for its fiscal year ending in January 2025, including $63.1 billion from its data center business. If $5 billion in China orders is wiped out, that could mean there’s significant downside risk to the consensus estimates.
It may put Nvidia’s outlook under pressure when the company reports results in late November, disappointing investors that have become used to the group consistently raising its outlook. The coming quarter, which covers the November to January period, could be impacted by the immediate effect of export rules that hit deliveries scheduled for yearly next year, to say nothing of any guidance further into 2024.
In a statement to Barron’s, a spokesperson for Nvidia said there is high demand for its advanced DGX and HGX systems, which take significant lead time to build. The spokesperson added that the group has been working to allocate these systems to a wide range of customers in the U.S. and elsewhere in addition to pursuing additional supply.
“These new export controls will not have a meaningful impact in the near-term,” the spokesperson added, echoing Nvidia’s statement from after the new rules were announced.
Shares in Nvidia were last down 2.6%, underperforming both the
S&P 500
and
Nasdaq
indexes.
Nvidia had already finished delivering orders of advanced chips to China this year, the Journal reported, citing multiple sources, and was aiming to get 2024 orders out before the new rules came into effect. But the government stepped in, according to the Journal, telling the company that the export restrictions were effective immediately, putting large orders from the likes of
Alibaba
(BABA) and
Baidu
(BIDU) at risk.
After such a winning streak for Nvidia on the back of the AI boom, it could be that geopolitics and tech regulation are threatening to hold it back.
Write to Jack Denton at [email protected]
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