One of investors' biggest questions in recent days was whether Nvidia (NVDA -1.02%), in its latest earnings report, would be able to keep up its incredible pace of triple-digit revenue growth. When the artificial-intelligence (AI) chip giant announced fiscal 2024 fourth-quarter earnings this week, it hit the ball out of the park.
Revenue reached new records, advancing in the triple digits in the quarter and for the year. And net income also climbed in the triple digits for both periods.
All of this is thanks to the company's dominance in the AI chip market. It has an 80% share, and demand is increasing for its products. Nvidia's stock has reflected this, advancing more than 270% over the past year.
But one element in Nvidia's earnings report left a mark on the otherwise pristine picture -- the drop in Nvidia's data center revenue in China, a country that's accounted for 20% to 25% of its data center revenue in recent quarters. Should you worry about the decline?
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U.S. ban on chip exports to China
It's important to consider the reason for this movement, which has to do with a U.S. ban starting late last year on high-performance chips to China and other countries considered a security threat. When the U.S. announced the move, it cited the potential for China to use the chips to produce "advanced military systems," such as weapons of mass destruction.
To comply with the ban, Nvidia stopped exporting its top-performing chips to China. As a result, data center sales to the country dropped "significantly" in the fourth quarter, when the country represented a mid-single-digit percentage of data center revenue. The company expects China data center revenue to make up about the same percentage of revenue in the current quarter, too.
What is Nvidia doing to address the situation? The technology giant is introducing alternative chips -- products that don't require a special license from the U.S. -- to the Chinese market. The company says it's now testing its new offering in the marketplace and aims to do its best to compete within the limits of the U.S. legislation.
The big risk for Nvidia is that local competitors will produce chips superior to what the American company is authorized to export to China -- and that could derail its sales there. Chinese customers may not want the slower chips at all or may accept them for a time -- until they're able to access more powerful chips at home.
Nvidia Chief Executive Officer Jensen Huang said during the recent earnings call that after the end of this new quarter, "[H]opefully we can go compete for our business and do our best, and we'll see how it turns out."
Record data center revenue
Let's get back to our question: Should you worry about a drop in China revenue persisting and hurting Nvidia's growth prospects? And the answer is, not necessarily.
Two reasons prompt me to say this. First, data center revenue climbed across all other geographies, resulting in triple-digit gains year over year to a record level of $18.4 billion. Even with revenue considerably lower in China, Nvidia's overall data center revenue still is soaring. If we imagine the worst-case scenario -- local chipmakers taking major market share -- other geographies have what it takes to drive major growth at Nvidia.
Second, when it comes to its competitiveness in China, Nvidia is just getting started with alternative products. As the company communicates with customers and learns how to navigate in the new environment, we may see stronger revenue down the road. And if we don't, as I mentioned, it may not be catastrophic for this high-growth AI player.
What does this mean for you as an investor? It's important to keep an eye on how things evolve in China. It's still a key market, and if Nvidia can win over customers with its new offerings and increase its growth there, the company's already bright picture could get even brighter. But if China revenue remains lackluster, it doesn't mean disaster for the company.
Nvidia remains a great buy today, thanks to its earnings gains in recent quarters and prospects in the high-growth area of AI.
