2023 has been a breakout year for artificial intelligence (AI) after spending years in the shadows. These advanced AI models can create original content from scratch -- including images, text, audio, video, and even computer code.
The business applications for generative AI are still emerging, but the ability to summarize emails and draft responses, generate presentations from existing information, and automate repetitive tasks has the potential to yield vast productivity gains. The latest developments in generative AI have business leaders scrambling to adopt and integrate this next-generation technology.
One of the primary beneficiaries of the exploding AI use is Nvidia (NVDA 6.18%). The semiconductor specialist was at the forefront of AI technology long before it went viral, and the company has reaped the benefits of its cutting-edge processors that facilitate the creation of these AI systems.
However, there's a situation brewing that could spell trouble for Nvidia, stopping the company in its tracks.
Image source: Getty Images.
Rare earth elements
In a strategic move earlier this year, China announced it would be restricting the export of gallium and germanium -- two of the rarest metals on the planet -- by requiring exporters to get a government license to ship the elements. They will also be required to identify the importer and the overseas buyer as part of the application process.
Experts suggest the move was in response to the U.S. government's decision to limit China's access to the high-end semiconductors used for AI.
While only used in small quantities, these metals are key components in the manufacture of advanced semiconductors, as well as in the defense, communications, and electric vehicle (EV) industries.
China has a near monopoly in the production of these metals and cited national security concerns when it announced the curbs. The country is responsible for 98% of the worldwide production of gallium and 68% of refined germanium, according to data supplied by the U.S. Geological Survey.
Further exacerbating the situation is the costly and complex nature of the refining process. Both gallium and germanium are typically mined with other metals found in nature, including copper, zinc, and aluminum.
During the month of August, China didn't export any gallium and germanium after shipments of 8.63 metric tons and 5.15 tons, respectively, in July. Beijing has since announced the approval of some export licenses, with additional applications still under review.
The immediate impact on Nvidia is negligible. The company doesn't manufacture its own chips but farms out production to Taiwan Semiconductor Manufacturing Company, which addressed the issue shortly after the export restrictions were announced.
"After evaluation, we do not expect the export restrictions on raw materials gallium and germanium will have any direct impact on TSMC's production," the company said in a statement. "We will continue to monitor the situation closely," it added.
An epic run
The accelerating adoption of AI has propelled a number of companies higher, but Nvidia has been the poster child for this trend. For its fiscal 2024 second quarter (ended July 30), Nvidia produced record revenue of $13.5 billion, up 101% year over year, while diluted earnings per share of $2.48 surged 854%. CEO Jensen Huang was clear that AI was the driving force behind the results, saying, "The race is on to adopt generative AI."
Nvidia is anticipating even more impressive results in the third quarter, guiding for all-time high revenue of $16 billion. The strong financial results have acted as a catalyst for Nvidia stock, which gained more than 220% so far this year.
If the Chinese government decides to play hardball, further limiting the exports of gallium and germanium, it could be like kryptonite to Nvidia stock, as production of its graphics cards and AI processors could come to a screeching halt. While that's an unlikely scenario, stranger things have happened, and investors should keep an eye out for any future developments.
