License Requirement for Nvidia’s Data Center GPUs Sold to China Could Be Troubling
Long-term investors should begin to find Nvidia stock attractive.
On Aug. 26, Nvidia (NVDA) announced that the U.S. government imposed a new license requirement for certain Nvidia data center graphics processing units, or GPUs, (the current generation A100 and upcoming H100) exported to China or Russia. We note Nvidia hasn’t been selling products to customers in Russia since the outset of the Russia-Ukraine war. Nvidia’s major cloud customers include Chinese firms such as Alibaba, Tencent, and Baidu for a variety of applications such as natural language processing, image recognition, and deep recommendation engines. The purpose of the new license agreement is to address risks related to military end use for Nvidia’s AI-related GPUs in the escalating U.S.-China tensions. In an SEC filing, Nvidia highlighted that its fiscal third-quarter revenue outlook included about $400 million in potential revenue to China that could be subject to the new license requirement. We believe many of the end use applications for Nvidia’s data center GPUs at Chinese customers are consumer-centric, so the firm should be able to attain licenses for these customers.
Shares fell about 4% during afterhours trading following the news. Although shares are trading at a discount to our unchanged $200 fair value estimate, we believe continued market volatility could create a more attractive entry point. Worth noting is that demand from Chinese hyperscale customers has been weak in recent quarters due to softer economic conditions in China related to COVID-19 lockdowns. We reiterate our expectation for Nvidia’s data center segment to grow at least 40% this year, though if Nvidia is unable to ship its data center GPUs to Chinese customers for an extended period, we would likely revisit our segment assumptions.
We think long-term investors should begin to find Nvidia attractive, as we think its data center business will prove relatively more resilient to macroeconomic challenges, though the developing situation with Chinese cloud customers is concerning.
Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.