Top data center and AI chip stocks like Nvidia (NVDA 3.71%) took the news of expanded sales restrictions to China poorly in October. Already dealing with a falloff in consumer electronics spending, Nvidia's upward trajectory had thus far remained intact for the important data center segment. But with the U.S. looking to hobble China's semiconductor industry and in turn its military by cutting off the country from AI circuitry and advanced equipment used to manufacture them, Nvidia's marquee moneymaker was also suddenly looking shaky.
However, according to a report from Reuters, Nvidia quickly drew up plans for a new chip that passes U.S. export controls for the Chinese market. Here's what Nvidia shareholders need to know.
How much is at risk from the China bans?
It was revealed back in early September that the U.S. was going to restrict Nvidia's most advanced data center computing accelerators (the new H100, as well as the previous-generation A100), as well as restrict the sale of any systems that include the H100 or A100, to China and Hong Kong. In a filing with the Securities and Exchange Commission, Nvidia said that it could lose out on $400 million in sales during its third quarter of fiscal 2023 if its customers didn't purchase an alternative product, or if the U.S. government didn't grant a special license to make a sale.
Even for Nvidia, a $400 million quarterly reduction in sales would be a big deal. Total revenue was $6.7 billion in the second quarter, with data center-specific revenue coming in at $3.8 billion. So an up to $400 million loss would give the data center segment, now by far Nvidia's largest end market, a more than 10% haircut.
But there's even more on the line. Back in late August, Nvidia provided a forecast for Q3 revenue to be $5.9 billion at the midpoint of guidance. That would represent about a 17% year-over-year decline in Q3 sales, but still about double the company's pre-pandemic sales. A decline in GPUs (graphics processing units) to high-end PCs for video games and a reduction in purchases from the cryptocurrency market (fewer sales after the Ethereum "merge" eliminated the need for GPUs to manage its blockchain network) is to blame for the Q3 year-over-year fall. Data centers are preventing a total rout, though, as that segment's still growing. If data center sales to China come to a grinding halt, that would be a different story entirely.
Chart by author. Data source: Nvidia.
It's no wonder Nvidia stock was down some 20% in September through mid-October given the rising risk to its business.
Enter the Nvidia A800
Nvidia just proved it's far from helpless in this situation, though. Engineers were apparently hard at work behind the scenes, because the company just made a new chip called the A800 available for customers in China and Hong Kong. Nvidia says this new data center design meets the U.S.'s threshold for maximum data center computing power. A handful of distributors in China already began marketing the A800.
Essentially, Nvidia made a scaled-down version of the A100 data center chip that throttles the computing and chip-to-chip communication speed of its systems used for AI and other high-performance computing. While this A800 wouldn't provide the same cutting-edge speeds in AI computation as the A100 or upcoming H100, it could still get the job done.
The question now is whether Nvidia's customers in China and Hong Kong will go ahead with purchases.
Either way, this is some much-needed good news for Nvidia. A rally in shares got some extra support on the A800's revelation. Nvidia stock is now down 50% in 2022, and 59% off of all-time highs notched in late 2021. Big drawdowns aren't uncommon in the semiconductor industry, although the current one -- hastened by the bear market this year -- was especially rough.
