Nvidia (NVDA 1.18%) has been in red-hot form this year with eye-popping stock gains of 188% as of this writing. However, shares of the company recently have been in pullback mode thanks to export restrictions imposed by the U.S. Department of Commerce on the sales of its data center chips to China.
Nvidia stock fell nearly 10% over the past week. The Commerce Department says that restrictions will be imposed on the sales of Nvidia's advanced artificial intelligence (AI) chips -- the H800 and the A800 -- to Chinese customers in the next few weeks. It is worth noting that the agency banned the sales of Nvidia's flagship H100 processor to China last year, which is why the chipmaker came up with a scaled-down version of its AI processors to meet government regulations.
However, the new rules mean that Nvidia will not be able to sell those chips to China anymore. But savvy investors may want to look at the bigger picture and consider buying Nvidia stock following its pullback. Let's look at the reasons why.
Putting Nvidia's Chinese business into perspective
Nvidia reportedly gets 20% to 25% of its data center revenue from China. That's a huge number considering that Nvidia's data center business generated $10.3 billion in revenue last quarter, jumping 171% year over year. However, Nvidia seems to be in a position to mitigate the impact of a loss in Chinese revenue thanks to the massive demand for its AI chips globally.
After all, there is a six-month waiting period for Nvidia's flagship H100 chip, which means that the company can reallocate its chip supply to other regions to make up for any potential revenue losses in China. It is also worth noting that the size of the AI hardware market in China was reportedly $8 billion last year, according to IDC. This number could jump to $15 billion in 2026, while the overall AI market (including software, services, and hardware) could be worth $26 billion.
Given that the global spending on AI systems could hit $154 billion in 2023 and jump to $300 billion by 2026, China's role in the global AI market could be limited.
Nvidia has a massive end-market opportunity it can tap into even without China. This is where the company's latest moves could make a big difference in the long run.
Vivek Arya of BofA Global Research recently reaffirmed his $650 price target on Nvidia stock, which points toward a 54% jump from recent levels. Arya's bullishness on Nvidia stems from the company's updated product roadmap, which includes an accelerated launch schedule of new data center chips. That will make it difficult for competitors to catch up.
Nvidia is doubling down on its biggest growth opportunity
The spike in the demand for AI chips is Nvidia's biggest growth driver right now. The chipmaker anticipates stronger year-over-year revenue growth of 170% in the current quarter to $16 billion, and that's not surprising given its dominant position in the booming market for AI chips.
Citi estimates that Nvidia is set to control a whopping 90% of the AI chip market. That's a big deal considering that the global AI chip market is anticipated to clock a compound annual growth rate (CAGR) of 29% through the end of the decade and generate a massive $304 billion in annual revenue in 2030, according to Next Move Strategy Consulting.
Not surprisingly, Nvidia is taking steps to ensure that it maintains its stronghold in this lucrative market so that it can keep the competition at bay. According to a recent investor presentation, Nvidia plans to release new AI chips every year instead of a two-year upgrade cycle.
For instance, Nvidia's A100 data center graphics processing unit (GPU), which was used for training ChatGPT, was released in 2021. Its massively popular successor, the H100, was released this year. This $40,000 chip reportedly commands a long waiting period of six months thanks to its ability to train large language models that require a lot of computing power. Nvidia will release its next-generation H200 data center GPU next year. The product roadmap also includes two more AI chips -- the B100 and X100 -- which are scheduled for release by 2025.
This strategy of regularly updating its AI chips could help Nvidia widen the gap with its rivals Intel and Advanced Micro Devices. Both companies have fallen behind Nvidia in the AI semiconductor race. While AMD is trying to take a shot at Nvidia's AI supremacy with its upcoming MI300X chip, which is expected to go into production in the current quarter, Intel says that its AI chips have a revenue pipeline of just $1 billion through 2024.
Considering that Nvidia now has an aggressive product roadmap that could see it releasing upgraded and more powerful chips from next year, don't be surprised to see the company extend its technology lead over rivals. This could pave the way for stronger growth for Nvidia, which is why it is not surprising to see analysts anticipating a big jump in the company's revenue going forward.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts
AI dominance could help Nvidia deliver solid long-term growth
Analysts are anticipating Nvidia's earnings to increase at an annual rate of 79% over the next five years. That would be more than double the 37% earnings CAGR Nvidia has clocked over the past five years. Nvidia may be able to live up to analysts' lofty growth expectations thanks to its move to a one-year AI product cycle instead of two years, which should ideally allow it to remain the top dog in the AI chip market.
Japanese investment bank Mizuho estimates that if Nvidia could maintain even a 75% share of the AI chip market by 2027, its annual AI-related revenue could jump 10x by then. Mizuho anticipates Nvidia will generate between $25 billion and $30 billion in revenue this year, suggesting that the chipmaker's AI dominance could drive terrific long-term growth.
If the overall AI chip market could be worth $304 billion in 2030, then even a 50% share of this market at that time would translate into $150 billion in annual revenue for the company. This would be more than 5 times the company's revenue of $27 billion in the previous fiscal year.
In all, AI chips present a massive growth opportunity for Nvidia, and the company is going all out to tighten its grip on this market. These moves could eventually translate into healthy stock gains for investors in the long run despite the challenges relating to China.
