Nvidia (NVDA 3.71%) and Advanced Micro Devices (AMD 1.33%) each made announcements on Wednesday that the U.S. had effectively banned them from exporting their most-advanced artificial intelligence (AI) chips to China. The stocks fell in yesterday's after-hours trading following the announcement and were down roughly 10.6% and 5.8%, respectively, as of 1:40 ET Thursday.
High-performance semiconductors are vital for technological innovations and national security interests, including AI. The U.S. appears to be taking steps to ensure that its AI and overall tech capabilities are not surpassed by China, arguably its foremost economic and geopolitical rival. What does this mean for these leading chip stocks?
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Access to chips has become a major international issue
Nvidia and AMD are leading producers of graphic processing units (GPUs) and advanced chips that are used for AI, video game hardware, data centers, machine vision, and other applications. AI is a key competitive battleground for countries and companies, and access to semiconductors has become an increasingly central national-security interest.
The U.S. government previously contacted semiconductor equipment-manufacturing company ASML Holding to stop it from exporting its extreme-ultraviolet (EUV) and deep-ultraviolet-lithography (DUV) machines to China. ASML's machines are used for the fabrication of high-performance chips.
In addition to recent manufacturing constraints and some uncertainty on the demand front, regulatory pressures are coming into focus as a potential headwind for leading players in the semiconductor industry.
Comments from AMD suggest that the company doesn't expect the ban to materially affect its performance. On the other hand, Nvidia sees a much more significant impact from the decision and estimates that the ban could result in it losing out on $400 million in sales this year.
The ban on each company's current generations of high-end AI chips potentially sets the stage for export blocks on other upcoming products, as the U.S. government's strategy on this front aims to address "the risk that products may be used in, or diverted to, a 'military end use' or 'military end user' in China."
AMD and Nvidia both have products and growth opportunities in categories beyond AI. Nonetheless, AI-related chips are a significant growth opportunity for both companies. AI is still a relatively young technology, and it's possible that early breakthroughs will translate to lasting competitive advantages when it comes to national defense, surveillance, and economic positioning on the world stage. The moves by the U.S. to stop Nvidia and AMD from exporting high-end chips speak to the importance of these technologies.
Do recent sell-offs present a buying opportunity?
Nvidia stock now trades down roughly 57.5% from its lifetime high, while AMD is down 49.5% from its valuation peak. But both companies still have growth-dependent valuations even after big valuation pullbacks. AMD has a market cap of roughly $127 billion and trades at roughly 18 times this year's expected adjusted earnings, while Nvidia is valued at approximately $332 billion and trades 39 times this year's expected profits.
While the near-term performance for semiconductor companies could be somewhat bumpy, the long-term demand outlook remains promising. Investors will have to weigh what level of volatility they are willing to take on and to what extent they are willing to embrace risk factors in the chip space.
In addition to manufacturing and regulatory constraints, it's possible that a sustained economic slowdown will hurt demand for chips and lead to weaker sales and earnings. The semiconductor industry has historically been highly cyclical, with chip-performance breakthroughs, product launches, and upgrade cycles shaping unit sales volume and margins. That's changing somewhat as chips have become increasingly integrated into a wider range of products, and as tech trends including AI and the growth of data centers are boosting demand. But it looks like things might get a bit bumpy in the short term.
For investors who see promise in the long-term outlook for the semiconductor industry, Nvidia and AMD are leading players in the space that could deliver strong performance over the long term. Recent sell-offs could be worthwhile opportunities to initiate or add to positions in the stocks.
But investors should proceed with the understanding that these growth stocks could see some volatile swings in conjunction with industry-specific developments and momentum for the broader market.
