The changing technological landscape has boosted a broad cross-section of stocks this year, but one of the biggest beneficiaries has been Nvidia (NVDA -4.34%). Dismal macroeconomic conditions stunted the sale of gaming chips last year, weighing on the company's results. More recently, however, improving conditions have boosted the tech sector, suggesting a recovery is on the horizon for one of Nvidia's biggest breadwinners.
Further fueling the company's rebound was the latest advancements in the field of artificial intelligence (AI). Improvements in large language models (LLMs) and generative AI resulted in the development of ChatGPT, a next-generation chatbot that showed just how far AI had come. This drove accelerating demand for the underlying technology and the semiconductors used to power it, which sent Nvidia stock soaring.
But a report emerged this week that could put Nvidia's ongoing recovery in jeopardy.
Nvidia DGX Grace Hopper 200 AI Supercomputer. Image source: Nvidia.
New restrictions
The Biden administration is reportedly considering additional restrictions on the export of AI chips to China, according to a report in The Wall Street Journal. This would be the latest step by regulators addressing concerns about how this cutting-edge technology could be used against U.S. interests, particularly in military weapons systems by foreign superpowers.
To quell these concerns, the U.S. Department of Commerce would require Nvidia and other chipmakers to obtain government licenses when selling high-end semiconductors to customers in China, Hong Kong, and Russia. Regulators are walking a tight rope between protecting national security interests and negatively impacting business operations.
Officials are also considering a curb on the use of cloud services by U.S. rivals, a way used by some Chinese companies to sidestep the previous restrictions.
Is history repeating itself?
Investors will recall that this isn't the first time Nvidia has faced curbs on its most advanced technology. In a regulatory filing from late August, Nvidia revealed the U.S. government had imposed new restrictions on exports of its A100 and H100 semiconductors to China, Hong Kong, and Russia. The (then) new rules would require chipmakers to apply to the U.S. government for a license before selling these chips -- which were specifically designed for supercomputing and high-end AI processing -- to customers in these restricted countries.
In the six weeks that followed, Nvidia stock plunged 31%, on fears that the company would ultimately lose a significant chunk of its business.
It's also worth noting that, at the time, Nvidia said the restrictions would impact roughly $400 million in potential sales to China, during a quarter when it ultimately reported revenue of $5.9 billion, so the restrictions affected less than 7% of the company's total revenue.
Nvidia pivoted quickly, developing an alternative chip -- the A800 -- to comply with the new, more stringent requirements, while still providing sufficient processing performance for use in these advanced applications. Investors who had run for cover poured back into Nvidia stock, sending shares soaring 61% from its trough over the following two months.
The big picture
Investors would do well to consider this latest development in terms of the big picture. Nvidia is on the cusp of a once-in-a-generation opportunity, supplying the state-of-the-art processors needed for AI. Wedbush analyst Dan Ives recently called AI the "fourth Industrial Revolution," suggesting the adoption of AI could represent an $800 billion opportunity over the coming decade.
To be clear, there's every chance that Nvidia could fall -- even significantly -- in the weeks and months to come. The events of late last year clearly illustrate just how volatile the stock can be. This is especially true given its lofty valuation, as Nvidia is currently selling for 55 times forward earnings and 10 times next year's expected sales.
History also makes clear that Nvidia's management has an uncanny ability to deal with challenges and setbacks with common-sense solutions, while also anticipating -- and in some cases instigating -- broader changes in the market. Remember, Nvidia leveraged the parallel processing capabilities of its gaming chips to enter and eventually dominate new markets, including cloud computing and AI.
Even if there are short-term stumbling blocks and the resulting volatility, investors should keep their eyes on the prize -- a stock price that could be multiple times larger 10 years from now.
