Shares of Nvidia (NASDAQ:NVDA) hit fresh year-to-date lows on Thursday after the chip-maker warned about the U.S. government limits on exports of top artificial intelligence (AI) chips to China.
In an 8-k filing with the Securities and Exchange Commission (SEC), Nvidia said it was contacted in the last week of August by the U.S. Government to be informed about new license requirements.
U.S. Government’s New Rules Impact Guidance
The company was told it needs permission from the government for any new exports to China, Hong Kong and Russia that includes its high-performance chips, namely A100 and forthcoming H100 integrated circuits.
Moreover, the new export ban includes any new chips that Nvidia plans to release that are capable of “achieving both peak performance and chip-to-chip I/O performance equal to or greater than thresholds that are roughly equivalent to the A100, as well as any system that includes those circuits,” Nvidia said.
The U.S. government fears that the deployment of top AI chips by military structures in the aforementioned countries could harm its national security interests. Nvidia disclosed that it doesn’t sell its products to customers based in Russia, hence the new export ban only refers to China and Hong Kong.
“The new license requirement may impact the company's ability to complete its development of H100 in a timely manner or support existing customers of A100 and may require the company to transition certain operations out of China,” Nvidia further noted in the filing.
Bearing in mind new restrictions, Nvidia warned that it may deliver results that fall below the issued revenue guidance for the third quarter. The chip-maker offered Q3 revenue guidance on Aug. 24, just two days before being informed by the government of new license requirements.
Nvidia guided to $5.9 billion in Q3 sales, plus or minus 2%. The company clarified in the filing that the offered guidance included about $400 million in potential sales to China, which is now at risk of materializing.
Nvidia warns that its China-based customers may not want to buy its products following the most recent developments. Moreover, its China-focused sales could be impacted by the U.S. government not grating required licenses “in a timely manner.”
While Nvidia's rival Advanced Micro Devices (NASDAQ:AMD) didn’t issue an SEC filing about new developments, the company confirmed it has received the same notification from the U.S. government as Nvidia did. In AMD’s case, the subject is the company’s top AI accelerator, the MI250, while its MI100 chips are not affected by the new requirement.
It is believed that AMD didn’t file an 8-k, which is used by publicly-listed companies to notify investors about specific events that may be important to shareholders, as it doesn’t expect the new license requirements to have a substantial impact on its business.
Slowdown Causing Shares To Correct More Than Anticipated
The warning caused Nvidia shares to drop 7.67% on Nvidia and return to trade below the $140 handle for the first time since the end of March 2021. Taking into account the latest drop in Nvidia share price, the stock now trades about 60% off its all-time high set in November last year.
On July 1, Nvidia shares printed a then-fresh low for 2022 before this week’s selloff pushed the stock below $140. It may be possible that shares will continue to slide, especially if the macro conditions continue to deteriorate, towards $125, where the 200 weekly moving average is located.
The China warning also prompted Daiwa analysts to downgrade Nvidia shares to neutral from outperform, which also seems to weigh on shares’ sentiment this week.
"There are now just too many uncertainties, especially given high valuation, of how much will the USG restrictions impact business, what is the normalized gaming growth rate, and will the weak economy hurt DC sales. We suggest investors move to the side while valuation resets, and long-term growth visibility emerges," analysts told investors in a note.
Fresh negative developments come just a week after Nvidia reported results that prompted shares to trade in a volatile manner. Nvidia reported Q2 revenue that was in line with the pre-announcement, while its adjusted EPS came in just a tad higher than the Bloomberg consensus.
“We are navigating our supply-chain transitions in a challenging macro environment and we will get through this,” Nvidia CEO Jensen Huang said in a press release.
Nvidia shares were forced to open lower the day after earnings as investors reflected negatively on the earnings report, which included a weak Q3 revenue forecast. However, Nvidia shares were able to race higher on Aug. 25 and close 4% higher as some investors saw weakness as a buying opportunity.
However, the latest warning on the export of AI chips to China may see even bullish Nvidia stock investors turn more cautious as headwinds increase. The chip-maker is already experiencing a notable slowdown given the deceleration in its business units exposed to crypto mining.
Nvidia’s graphics cards were instrumental in the mining process for certain cryptocurrencies, most notably Ethereum. While the security of Ethereum wallets has increased, the world’s second-largest digital asset is shifting to proof-of-stake (PoS) from proof-of-work (PoW) system this month, hence Nvidia’s graphic cards won’t continue to experience strong demand.
Colette Kress, Nvidia’s CFO, warned recently that the volatility in the crypto market “has in the past impacted, and can in the future impact, demand for our products and our ability to estimate it accurately.”
Summary
Nvidia shares have hit an 18-month low in recent days after the company warned shareholders that it may suffer a material impact from the new U.S. government regulation on the export of top AI chips to China. The new overhand for shares comes just a few days after the chip-maker issued a disappointing sales guidance for the third quarter.