With new U.S. export restrictions, can Nvidia thrive in the long term without China?

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Nvidia (NVDA) can for now likely withstand fresh U.S. regulatory hurdles limiting its business in China, largely due to robust demand for its artificial intelligence chips across the globe. But for Nvidia to continue to grow earnings at the clip many investors have come to expect, the semiconductor firm will likely need the Chinese market. The U.S. government plans to restrict the sale of advanced AI chips to China in the coming weeks, the Commerce Department announced Tuesday. The tighter export controls are expected to crimp Nvidia’s ability to sell its H800 and A800 chips to China — products the company developed last year to comply with the Biden administration’s initial restrictions on AI technology bound for the world’s second-largest economy. Shares of Nvidia – the world’s dominant AI chipmaker – fell 4.68% Tuesday, to close at $439.38 each. “It’s disappointing to see the fresh restrictions on Nvidia since it made these chips specifically for its Chinese customers,” Jeff Marks, the Club’s director of portfolio analysis, said Tuesday. He added: “The short term impact should be immaterial since demand for Nvidia’s AI chips is so strong in the rest of the world and exceeding supply…and it would not surprise us to learn that Nvidia has the ability reconfigure these chips to meet the standards of regulators.” “But long term, there will need to be some give on China in order for the company to continue growing at these higher rates,” Marks argued. Nvidia’s profit tripled in the three months ended July 30 , and the company in August issued an implied earnings guidance for the current quarter that far exceeded Wall Street’s expectations. While analysts generally see Nvidia’s earnings growth moderating looking out a few years, projections still point to significant increases — helping to justify a premium valuation to its peers. For its part, Nvidia on Tuesday said it doesn’t “expect a near-term meaningful impact” on its financial results given strong demand for its chips. Indeed, orders for the company’s chips have skyrocketed over the past year — resulting in shortages — amid booming interest and investment in generative AI . KeyBanc Capital Markets said Tuesday that the new restrictions are a negative for Nvidia, arguing “it will ultimately be difficult to backfill China demand.” The A800 and H800 are modified versions of Nvidia’s cutting-edge AI chips used in data centers, known as the A100 and the more recent H100. Before the Biden administration’s 2022 export controls took effect, Nvidia was able to sell its top-of-the-line AI chips to U.S. cloud-computing providers such as Club holdings Microsoft (MSFT) and Oracle (ORCL), as well as Chinese tech giants. That changed last year when the U.S. government stipulated that advanced processors exceeding certain performance thresholds required a license to be sold to Chinese customers. To comply with the new rules, Nvidia created the A800 and H800 chips, which had slower data-transfer speeds and therefore didn’t violate the export controls. Crucially, the introduction of the H800 and A800 crucially allowed Nvidia to offset potential revenue losses from China, which the company had estimated last year could total $400 million . China has historically accounted for between 20% and 25% of Nvidia’s data-center revenue, the company has said, comprising sales of both AI chips and networking products. China revenue fell within that range during Nvidia’s last reported quarter — a sign its customers in the country were ordering the throttled-back chips . The latest export controls, which U.S. officials said will go into effect in 30 days, again threaten those sales. With U.S.-China relations at a recent low point , the Biden administration has argued the export controls are necessary to cut off the Chinese military from the most advanced AI and supercomputing technology. But Nvidia has warned that tighter restrictions portend “a permanent loss of an opportunity” for U.S. semiconductor firms to “compete and lead in one of the world’s largest markets.” While Nvidia’s technological advantage on AI remains clear compared with semiconductor peers such as Intel (INTC) and Advanced Micro Devices (AMD), we share the company’s sentiment about the long-term challenges in China presented by current U.S. policy. — CNBC’s Kristina Partsinevelos contributed reporting to this article. 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An exterior view of the NVIDIA headquarters in Santa Clara, California, May 30, 2023.

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