Market Commentary: The Downside Is Huge Now

It’s not widely known that Nvidia once designed its chips to specifically fall just below U.S. export restrictions, ensuring they remained marketable in China. Unfortunately for them, that loophole just got sealed, and it has big implications for investors.

Nvidia share price hit choppy waters after new U.S. export restrictions aimed to sever the chipmaker’s ties with China. While the company has shown resilience by modifying its AI chips for the Chinese market in the past, this new geopolitical curveball could alter the landscape significantly.

The fallout, though, is not limited to the chipmaker. It has far-reaching consequences, as you’re about to find out.

Key Points

• Nvidia is facing new U.S. export restrictions that have made two of its specialized AI chips for the Chinese market unsellable. 
• The imposition of these export restrictions has affected not only Nvidia but also its competitors, Intel and AMD.
• Nvidia’s dominant market position could be jeopardized if it can’t continue to sell in China, one of its largest markets. The company held about 80% of the discrete GPU market share as of Q2 2022, making the loss of the Chinese market a significant but not fatal blow.

Fallout from Export Restrictions

In a recent filing, Nvidia disclosed that the new rules would prevent the sale of two of its specialized AI chips: the A800 and H800. Created to cater to the Chinese market while complying with existing export laws, these chips now find themselves at an impasse.

And it’s not only Nvidia feeling the brunt of the legal restrictions. Chips from Intel and AMD also find themselves in the crosshairs, with products like Intel’s Gaudi 2 and AMD’s MI250 potentially ensnared by the updated policies.

The timing of this development is crucial for Nvidia, considering it recently announced the L40S chip in August, which is now also under the hammer.

With all that said, if one chipmaker finds a way to circumvent the regulations successfully, it could gain a substantial edge over the others.

Is Nvidia On Sale Now?

Following the news, Nvidia’s stock took an almost 5% nosedive. The decline in share price eroded $53 billion from Nvidia’s market cap, sending shockwaves through the semiconductor industry. The company maintains, however, that there won’t be a “near-term meaningful impact” on its financial results, offering some solace to investors. The S&P 500 index also showed a relative decline following this news, with AMD and Intel also experiencing pullbacks. 

Despite the setback, Nvidia is still above a critical level of support at $400 per share. This suggests that the market perceives the sell-off more as a buying opportunity rather than a flight risk.

We still think there’s risk to new investors accumulating a position now. For example a discounted cash flow forecast analysis puts fair value at $307 per share, meaningfully lower than present levels.

The Technology Race

Nvidia has been a leader in the AI chip industry, setting itself years ahead of competitors like Intel and AMD in AI hardware and software.

While the company had catered to the Chinese market with specialized chips, competitors were trying to catch up but now find themselves similarly hamstrung by export restrictions.

Nvidia’s preeminent position in AI could be materially affected if it can’t continue to sell in one of its largest markets. Moreover, any long-term restrictions could also cause the company to rethink its global strategy and even consider relocating some of its operations.

The Bottom Line

Nvidia has been a leader in 2023, helping to power the S&P 500 higher. However, the new export regulations have introduced an element of uncertainty that investors cannot afford to ignore. While the company remains bullish about its near-term financial impact, the long-term consequences of these geopolitical tensions are still a grey area.

For now, Nvidia’s strong market positioning and robust financial health provide some buffer against these challenges. But as an investor, keeping an eye on how Nvidia and its competitors navigate these choppy geopolitical waters could be crucial for your portfolio’s long-term health.

Our analysis suggests the risks are high now when comparing share price to fair value and pairing that with the recent technical chart breakdown.