Nvidia, the leading chip maker in artificial intelligence (AI), saw its stock fall for a second consecutive day. This decline comes as investors process the implications of new U.S. export controls that will impact the company's sales to China. While analysts believe that these rules will not immediately harm Nvidia's performance, the long-term outlook appears more concerning, which could adversely affect the stock.
Stock Decline Continues
Nvidia's stock was down 1.8% during premarket trading on Wednesday, following a 4.7% slide on Tuesday.
Impact of Export Restrictions on AI Chips
The major factor impacting Nvidia's stock is the tightening of restrictions on the export of chips used in AI applications. This move makes sense considering the investor frenzy surrounding AI, which has driven Nvidia's stock up by 200% this year.
The Commerce Department announced on Tuesday that it was updating regulations introduced in 2022 to limit China's access to advanced technology. The latest changes now ban exports of the most cutting-edge chips, including Nvidia's, without a license. Additionally, exports of semiconductors just below that threshold will require government notification, which could potentially lead to a ban.
To export chips just below the restricted threshold, companies will have to notify the government, which then holds the power to ban individual sales.
Near-Term Impact Appears Limited
Nvidia remains confident that the additional restrictions will not significantly affect its financial results in the near term. In their filings with the Securities and Exchange Commission, Nvidia stated that they expect continued strong global demand for their products despite these restrictions.
Long-Term Concerns Over China's Revenue Share
Analysts, however, hold a more cautious stance regarding the long-term impact, particularly due to China's significant contribution to Nvidia's data center business revenue. China currently accounts for roughly 20% of the company's data center business, which represents a significant portion of Nvidia's dominance in AI.
Citi analyst Atif Malik expressed his concerns in a research note, stating that they are adjusting their estimates for fiscal years 2025 and 2026 and assume a low likelihood of the U.S. government granting export licenses. As a result, they have lowered their price target for Nvidia's stock from $630 to $575. Nonetheless, Malik maintained a Buy rating, citing the "secular AI growth which remains in early innings."
Conclusion
While the immediate impact of the new U.S. export controls on Nvidia seems limited, there are potential long-term challenges ahead. As China represents a substantial revenue stream for Nvidia's AI-dominated business, analysts are more cautious about the company's future prospects. However, despite these concerns, many experts still believe in the long-term growth potential of Nvidia's AI technology.
Export Controls Pose Challenges for Nvidia in China Market
When U.S. export controls were implemented last year, Nvidia managed to develop a lower-performance chip specifically designed for the Chinese market. However, the question arises as to whether the company can replicate this strategy given the current circumstances.
According to Piper Sandler analyst Harsh Kumar, Nvidia is expected to rapidly adapt its chip design to meet the new standards, resulting in minimal disruptions to its current business outlook. Kumar maintains an Overweight rating on Nvidia's stock and sets a price target of $620.
On the other hand, Citi analyst Malik expresses less certainty regarding Nvidia's ability to sell in China. Malik believes that the increased stringency of performance density thresholds will necessitate more than just networking modifications, making it challenging for Nvidia to penetrate the Chinese market as it previously did.
While investors have remained optimistic in the face of prior U.S. chip-export controls, as well as the recent speculation about this week’s developments, KeyBanc Capital Markets analyst John Vinh raises concerns about the significance of the Chinese market for Nvidia's long-term growth. The strong global demand for chips powering AI applications may not fully compensate for the potential decrease in sales from China.
Vinh states in a note that he views this development as negative for Nvidia in the long term, as attempting to fill the void left by decreased China demand will prove challenging. He estimates that a 20% impact on their data center estimate for FY25 would translate into a headwind of approximately $20 billion and negatively affect their earnings per share estimate of $25.62 by around $5.
Notably, other chip makers are also experiencing the repercussions of these export controls. Intel saw a decline of 1.4% in its stock on Tuesday and experienced an additional 1% drop in premarket trading on Wednesday. Likewise, shares in Broadcom fell 2% on Tuesday and declined by an additional 0.8% in early Wednesday trading.
In conclusion, the implications of the export controls for Nvidia's operations in the Chinese market raise concerns among analysts and industry experts. The long-term impact on the company's growth potential and the difficulty of finding alternative markets to compensate for the loss in China demand present significant challenges for Nvidia moving forward.
