Graphics chip company Nvidia (NVDA 3.65%) is dealing with a glut of gaming graphics cards following a multiyear period of shortages, sky-high demand, and soaring prices. Thankfully, the company's data center business, which includes high-powered graphics chips used to accelerate artificial intelligence (AI) and other number-crunching workloads, is still performing well.
Nvidia already slashed its guidance to account for weak gaming demand, but now the company sees a potential $400 million hit to its data center segment. On Wednesday, the company disclosed that the U.S. government had imposed a new license requirement on exports to China, Hong Kong, and Russia of its high-powered A100 and H100 data center GPUs. The intent is to keep these ultra-powerful chips out of the hands of the Chinese military.
How important is China to Nvidia?
While the new export restrictions only affect certain data center GPUs, it's worth asking how much revenue Nvidia generates from China across all its segments. Answering that question is harder than it seems. In the gaming segment, Nvidia relies on its partners to assemble and sell graphics cards to end users.
In fiscal 2022, which ended on Jan. 30, Nvidia reported $7.1 billion of revenue attributable to China and Hong Kong. Another $8.5 billion of revenue was attributable to Taiwan, which isn't part of these export restrictions but is nonetheless embroiled in the rising tensions between the U.S. and China. Total revenue was $26.9 billion for the year.
These numbers don't give any indication of where Nvidia's GPUs actually end up. In the gaming business, Nvidia sells its chips to its board partners, who then sell completed graphics cards to end users. Many of those partners are based in China and Taiwan, which explains the outsized revenue contribution from those areas.
If the goal of the U.S. government is to stunt China's AI efforts, it's not hard to imagine this situation getting a whole lot worse for Nvidia. The export restrictions cover only some of Nvidia's powerful data center chips, but the company's gaming graphics cards are also capable of accelerating AI workloads. Of course, Nvidia's gaming GPUs aren't as powerful, and they're not tuned specifically for that purpose. But they're still very capable.
If export restrictions were ever applied to powerful gaming GPUs as well -- perhaps an unlikely scenario -- it would cause all sorts of problems for Nvidia. Board partners wouldn't be able to get graphics chips, so it would affect sales in regions beyond China.
Should you buy on the bad news?
Nvidia stock has been slumping for nearly a year, and this export news isn't helping. Shares of Nvidia were down more than 7% on Thursday as investors reacted to the escalation in trade tensions between the U.S. and China.
Is Nvidia now a bargain? I wouldn't be so sure. The semiconductor industry is cyclical, and Nvidia is in the bad part of the cycle right now. There's too much supply and too little demand, which means that Nvidia is being forced to slash prices to move inventory. Net income crashed 72% year over year in the second quarter.
The situation will eventually improve, but there's probably no going back to the pandemic-era frenzy around graphics cards. Based on the current stock price, Nvidia trades for around 40 times forward earnings. Considering that the oversupply of gaming GPUs could go on for a while and that the Chinese export situation could potentially escalate, that valuation doesn't seem like a clear-cut bargain to me.
