Washington’s Tightened Grip on AI Chip Sales to China Could Impact Nvidia and Chip Stocks
Recent export restrictions imposed by the U.S. Commerce Department on artificial intelligence (AI) chip sales to China could have long-term consequences for Nvidia, a leading player in the AI industry. The announcement of these new curbs aims to limit China’s access to advanced computing power and close existing loopholes. As a result, chip stocks experienced a decline earlier this week, with Nvidia losing 7% and Advanced Micro Devices and Marvell Technology slumping more than 2%. Although some stocks recovered on Thursday, analysts and portfolio managers believe that if these restrictions continue, it could hinder sales opportunities for popular chipmakers and potentially lead to Chinese retaliation.
Impact on Nvidia
Nvidia disclosed in a filing with the Securities and Exchange Commission (SEC) that the latest government curbs might hinder its new product development timeline and affect several chip models. The export restrictions go beyond the latest-generation H100 product, which powers many large language models used in AI, and also prevent the sale of less advanced H800 and A800 models previously available in China. The primary objective of these restrictions is to prevent China from utilizing advanced semiconductor chips to enhance its military capabilities. However, this ruling affects more than just China, as it also adds licensing requirements for countries such as Vietnam, Saudi Arabia, and the United Arab Emirates. Consequently, some Wall Street investment banks have adjusted their price targets on Nvidia shares to account for potential slowing sales. Analysts anticipate that Advanced Micro Devices and Intel, among others, will also be impacted by these export curbs.
Long-Term Outlook
Although the immediate impact on Nvidia seems limited, analysts and professional investors are preparing for potential earnings and revenue setbacks in the future. Bank of America’s Vivek Arya predicts a 5% to 10% downside to Nvidia’s fiscal year 2025 sales and an 8% to 10% hit to earnings per share (EPS) compared to previous projections. JPMorgan Chase expects an impact in the second half of 2023, while analyst Harlan Sur estimates a 5% impact to EPS in 2024 and up to 8% in 2025, assuming that the combined China and AI exposure represents 8% of revenues. Furthermore, Nvidia’s data center exposure to China, which accounts for 20% to 25% of revenues, will be impacted by the restrictions. While some experts suggest that cutting ties with China may prove challenging due to interconnected supply chains, others believe that not all subsectors of the semiconductor industry will be affected. U.S. semiconductor equipment manufacturers and electronic design automation names are expected to experience minimal impact. Despite the potential challenges, many investors and analysts remain optimistic about the overall outlook for the semiconductor industry, citing strong demand for AI.
Conclusion
The tightened grip on AI chip sales to China by Washington has raised concerns about the long-term implications for Nvidia and chip stocks. While the immediate impact may be limited, the continuation of these export restrictions could hinder sales opportunities and potentially lead to Chinese retaliation. Nvidia has already highlighted potential hindrances to its product development timeline and sales of certain chip models. Analysts anticipate that other chipmakers, such as Advanced Micro Devices and Intel, will also face challenges. However, some experts believe that not all subsectors of the semiconductor industry will be affected, and the broad outlook for the industry remains positive. Despite the uncertainties, the demand for AI is expected to remain strong, which could offset some of the loss of demand in China.