Nvidia stock plummets due to new restrictions in China

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The central theses

  • The US government has imposed new restrictions on microchip exports to China over national security concerns
  • Nvidia has said the regulations will put a $400 million hole in its sales in the next quarter
  • The ban will also apply to Russia, however, Nvidia currently has no Russian customers and will therefore have no further impact on its business

Nvidia’s share price plummeted on Wednesday, falling 6.5% in after-hours trading. The drop came on news that the US chipmaker would be restricted from selling in the Chinese market over national security concerns.

This change is a result of updated license requirements that would apply to all future exports to mainland China and Hong Kong.

The new rules don’t go as far as banning the export of their chips entirely, but they do restrict the export of the most powerful server processors. It is believed that this is to ensure that the most advanced technology is not made available for use in Chinese military applications.

Nvidia released the details of those rules and how they would affect their business in a filing with the SEC on Aug. 26. They also said they expect to lose $400 million in revenue in just one quarter versus $5.9 billion in revenue that was expected.

An Nvidia spokesperson said: “We are working with our customers in China to satisfy their planned or future purchases with alternative products and may seek licenses where replacements are not sufficient. The only current products that will be subject to the new licensing requirement are the A100, H100 and systems like DGX that include them.”

The chips in question are mostly found in data centers, which are a growing part of Nvidia’s business. Though they’re best known for their gaming chips, the data center business has grown strongly, with revenue increasing from $6.7 billion in 2020 to $10.9 billion in 2021. Analysts were expecting that number to rise again to $15.9 billion in 2022 before the announcement.

The new restrictions also apply to Russia, but Nvidia currently has no customers based in Russia and will therefore not see any impact on its business.

Rival chipmaker AMD also announced similar limitations for one of its chips, the MI250’s artificial intelligence, but this isn’t a big seller for the company and they don’t expect it to boost their revenues.

Nvidia has requested an exception to the new rules, but there is currently no indication that the government will be willing to relax the rules.

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What do the new chip restrictions mean for investors?

It’s definitely spelling some near-term pain for Nvidia investors as the stock has plummeted on the news. It is down 6.5% in Wednesday’s extended trading and is down another 4.3% in Thursday’s premarket trading at the time of writing.

Over the long term, this is unlikely to have a significant impact on Nvidia’s prospects, one of the world’s largest chipmakers.

The $400 million drop in revenue, while a significant number, accounts for just 6.8% of the company’s expected quarterly revenue. That’s a sizable percentage of Nvidia’s overall business, but it probably won’t be enough to cause any major problems in the long run.

It underscores the importance of diversification and how different market sectors can be influenced at any given time.

The technology sector can be very important for investors. Many areas of the industry have achieved phenomenal returns and are now home to the largest companies in the world.

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