Nvidia (NVDA 5.71%) stock declined 6.6% in Wednesday's after-hours trading session, following the tech giant's disclosure via a filing with the U.S. Securities and Exchange Commission (SEC) that the U.S. government has ordered it to immediately halt sales to China of certain chips and systems for data centers, which are capable of handling advanced artificial intelligence (AI) workloads.
National and international security are the apparent reasons for the policy change.
Thursday is poised to be a tough day for Nvidia investors.
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License now required for export to China and Russia of certain chips
Last Friday, the U.S. government informed Nvidia that it had "imposed a new license requirement, effective immediately, for any future export to China (including Hong Kong) and Russia of the Company's A100 and forthcoming H100 integrated circuits," the company said in Wednesday's SEC filing.
Nvidia doesn't sell any products to customers in Russia. So for all practical purposes, the new requirement only applies to its sales to China.
This license requirement also applies to systems that Nvidia sells that incorporate these chips, including its DGX systems (AI supercomputers), or the A100X chip. Moreover, it includes any future Nvidia chips that have "peak performance and chip-to-chip I/O [input-output] performance equal to or greater than thresholds that are roughly equivalent to the A100."
The new requirement aims to reduce the risk that the "covered products may be used in, or diverted to, a 'military end use' or 'military end user' in China and Russia," according to the filing.
It's probably safe to assume that one main objective of the U.S. government is to limit the potential for the diversion of U.S. technology from China to Russia that could be used by Russia in its war against Ukraine.
How much could this license requirement hurt Nvidia's third-quarter sales?
Nvidia's revenue guidance for the fiscal third quarter, which it issued last week when it released its second-quarter results, "included approximately $400 million in potential sales to China which may be subject to the new license requirement if customers do not want to purchase the Company's alternative product offerings or if the USG [U.S. government] does not grant licenses in a timely manner or denies licenses to significant customers," Nvidia said in the SEC filing.
Nvidia's Q3 revenue guidance was $5.9 billion. So, the loss of about $400 million in sales to China would result in a 6.8% reduction to its expected quarterly revenue. The percentage hit to profitability would almost certainly be worse because Nvidia's data center platform is more profitable than the overall company. It's hard to estimate the potential reduction to the bottom line because Nvidia doesn't provide profitability results for its platforms, which are data center, gaming, professional visualization, and automotive. (The company also has a relatively small "other" category.)
In addition to this approximately $400 million loss of sales to China, the new license requirement could hurt Nvidia's financial results in another way. It could affect its "ability to complete its development of H100 in a timely manner or support existing customers of A100 and may require [it] to transition certain operations out of China." The company is seeking exemptions for its internal product development and support activities that are located in China.
Is a Nvidia stock sell-off a buying opportunity?
Short answer is yes, but with caveats.
Folks who have been wanting to invest in Nvidia should view a sell-off on this licensure requirement news as a buying opportunity. The new regulation will hurt the company's growth prospects over the short term and possibly even the medium term. But Nvidia has many avenues for long-term growth and a geographically diverse customer base.
That said, there are a couple of caveats. First, only those who truly have a long-term investing mindset should consider buying shares at this time, as the short-term ride could be choppy. Second, the Nvidia stock sell-off might last for a bit, so it might be wise to wait until the dust has somewhat settled to make investing decisions.
