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🛑 NVIDIA: Chip & Tell?
Things have unraveled quickly for chipmaker Nvidia Corporation (NVDA), from being one of the pandemic’s success stories to having shares trade at a 52-week low. The US government has added to its headache amidst falling sales and sour investor sentiment. Will Nvidia become the fall guy in the latest round of Chinese checkers between the US & China?
Another Round
Everybody wanted chips during the pandemic to manufacture PCs, smartphones, gaming consoles, and even to mine cryptos. Today, while the demand for the first three is down in the dumps, we all know what has transpired with cryptocurrencies over the last few months. While supply-side issues with healthy demand are a good headache for companies, a demand & supply issue is an unwanted double-whammy!
Nvidia is the largest chip manufacturer in the US by market value. It has marquee clients not only in the US but also overseas. Some of those include Alibaba and Tencent, both selling cloud services powered by Nvidia’s chips capable of crunching tons of data for advanced applications.
As tensions between the US & China escalate, the former has tried stopping the exports of chip-making equipment to China to thwart its ambition for chip-factory dominance. The US also passed a $52B tech bill to boost semiconductor manufacturing in the country. The bill also looks to prevent companies from using subsidies if they build or expand their semiconductor capabilities in China or other non-allied nations.
China has identified Artificial Intelligence as a leading strategic technology and has thrown itself behind domestic companies and laboratories. However, it still depends on US companies like Nvidia for the advanced chips needed to program complex AI algorithms. The US government fears Chinese companies could use chips made with their technology for military purposes or steal trade secrets.
The US fired a fresh salvo on Wednesday, asking Nvidia to restrict future sales in China. The company told the SEC that they will now require a license for future exports to China, including Hong Kong, to reduce the risk of military usage. The restrictions will hurt the sale of Nvidia’s A100 and H100 Graphic Processing Units (GPUs) to businesses.
Nvidia introduced the A100 chip in June 2020, explicitly designed for AI, and could enable a host of new applications for the technology. Both products are part of accelerating machine learning tasks.
Nvidia The Fall Guy?
The latest restrictions could cost Nvidia $400M, or ~7% of the previous quarter’s revenue, in potential sales to China for the current quarter. The rule also applies to sales in Russia, but it does not carry out sales in the country.
Nvidia is working with customers in China on their planned and future purchases with alternative products and also plans on seeking licenses for products where replacements do not suffice. It received some relief on Thursday when the administration granted authorization to carry out exports to support US customers of the A100 chip till March 1, 2023.
It is not as if only China depends on Nvidia powering their programs. Over a quarter of the company’s fiscal 2022 revenue came from China and Hong Kong, two markets co-founder Jensen Huang calls “very important and very large.”
Advanced Micro Devices (AMD) has also received new licensing requirements from the US Department of Commerce for its MI250 circuit, intended for AI. However, unlike Nvidia, AMD said the move would not have a material impact on their business. The new rules prevent companies from shipping any future chip that achieves performance similar to the A100 without getting a license.
No prizes for guessing that China opposed Washington’s move, accusing them of continuously abusing export control measures to restrict semiconductor exports. The Chinese Commerce ministry accused the US of deviating from the principle of fair competition and violating international economic and trade rules. It warned that the move would hurt not only legitimate Chinese interests but also US enterprises, along with the stability of the global industrial & supply chain.
The US Department of Commerce says it took action to protect US national security and prevent China from engaging in activities the US opposes.
The restrictions compound Nvidia’s misery when it is already struggling with slowing sales. It warned investors last month of a sales shortfall after significantly missing its projections for the quarter ended July. While sales will still increase year-on-year, the pace of growth will be the slowest in three years. The warning echoes the commentary of its peers like AMD, Micron & Intel.
Nvidia’s shares have slipped to a 52-week low from their peak in just nine months. Chip companies bore the brunt during the US-China trade war of 2018, and they are again in the firing line as the two countries embark on another round of oneupmanship. Can Nvidia work its way out of trouble or end up being the fall guy in this battle? Let's ponder over this while typing on our Nvidia-powered machines!
Market Reaction
NVDA ended at $139.37, down 7.67%.
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