Nvidia, the dominant player in artificial intelligence chip technology, is expected to announce another exceptional profit forecast on Tuesday. The key concern revolves around the potential impact of escalating U.S. restrictions on the sale of its high-end chips to China.
This development will not only be a crucial test for the AI-driven surge that has propelled the U.S. stock market, with the Philadelphia semiconductor index ( .SOX ) surging by nearly 50% in 2023, but also for Nvidia’s market position.
Kyle Rodda, a scientist at Capital.com, highlighted the underlying assumption of Nvidia’s market supremacy. Any factors affecting this perception, whether related to business performance or market risks, could temper the current enthusiasm surrounding the company.
The recent ban imposed by the Biden administration on the sale of Nvidia’s H800 and A800 chips in China has raised concerns. With over one-fifth of Nvidia’s profits originating from China, this restriction poses a significant challenge as China stands as its third-largest market.
Although Nvidia has expressed confidence in the face of these restrictions, citing no immediate impact, reports of potential jeopardy to Chinese orders worth up to $5 billion led to a dip in its stock value to a five-month low in October.
Following a rapid surge earlier this year, Nvidia’s stock experienced a more than 12% decline between August and October, despite its earlier milestone as the first trillion-dollar chip company. This downturn reflects growing investor apprehension amidst mounting uncertainties related to China.
Currently trading at 31 times its 12-month forward income projections, Nvidia’s valuation surpasses that of AMD, with a price-to-earning ratio of 33.
CHINA’S Influence on Nvidia’s Market Position
The demand for Nvidia’s H800 chip, a scaled-down version of its flagship AI chip that outperformed rivals before the recent trade restrictions, had been robust.
Analysts have noted that Nvidia has developed three alternative chips tailored for the Chinese market and plans to introduce them soon.
While earlier workarounds necessitated minor adjustments to memory bandwidth, the latest restrictions are expected to significantly impact overall performance, as highlighted by Bernstein scientist Stacy Rasgon.
Despite these challenges, these chips may still find favor among Chinese consumers while aligning with U.S. regulatory requirements.
Experts anticipate Nvidia to report a substantial second-quarter revenue increase of nearly 173%, with Wall Street projecting a revenue surge of over 195% for the latest quarter.
Future Prospects and Innovations
Nvidia recently unveiled its cutting-edge AI chip, the H200, boasting enhanced memory bandwidth to maintain its competitive edge against AMD and its upcoming MI300 chip.
Leading cloud service providers, including Amazon Web Services, Google Cloud, Microsoft Azure, Oracle Cloud Infrastructure, alongside specialized AI cloud services like CoreWeave, Lambda, and Vultr, are set to offer access to H200 cards.
Despite its remarkable progress, Nvidia’s rapid expansion may eventually lead to a decline in revenue from China, according to analysts at Morningstar.
Reporting from Bengaluru was provided by Arsheeya Bajwa and Mehta Chavi, with processing handled by Devika Syamnath.
Graphics Reuters
