Last Thursday, Nvidia (NVDA 6.18%) stock jumped 16.4% after the artificial intelligence (AI) chip leader turned in another blockbuster quarterly report. Growth in the fourth quarter of fiscal 2024 (ended Jan. 28) was driven by continued turbocharged demand across industries and regions for the company's data center platform's chips and related products that enable AI capabilities.
In fiscal Q4, Nvidia's revenue surged 265% year over year to $22.1 billion, beating Wall Street's expectation of 241% growth. Adjusted earnings per share (EPS) skyrocketed 486% to $5.16, sprinting by the analyst consensus estimate of 426% growth. Moreover, management guided for triple-digit-percentage growth to continue, with Q1 fiscal 2025 revenue and adjusted EPS expected to soar 234% and 396%, respectively.
Earnings releases tell only part of the story. On the Q4 earnings call, management discussed a topic that investors should know about: Nvidia's data center platform's sales to China.
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Nvidia developed new regulation-compliant solutions that do not require a license for export to China
In October 2023, the U.S. government released new and expanded regulations pertaining to the export to China and select other countries of AI-enabling products that exceed certain performance thresholds.
From CFO Colette Kress' remarks:
Growth [in our data center platform] was strong across all regions, except for China where our data center revenue declined significantly following the U.S. government export control regulations imposed in October. Although we have not received licenses from the U.S. government to ship restricted products to China, we have started shipping alternatives that don't require a license for the China market. China represented a mid-single-digit percentage of our data center revenue in Q4. And we expect it to stay in a similar range in the first quarter.
Historically, China has accounted for about 20% to 25% of Nvidia's data center revenue, Kress shared on the company's Q2 fiscal 2024 earnings call. So, it's a huge drop from that historical level to a mid-single-digit percentage, which should mean 4% to 6%. For further context, Nvidia's data center accounted for 83% of its total revenue in fiscal Q4 ($18.4 billion of $22.1 billion).
Of course, Nvidia didn't likely lose any data center sales in fiscal Q4 because it's currently supply constrained. It probably just shifted what products would have gone to the China market, absent the U.S. government regulations, to customers in other regions. That said, longer term, the company could lose at least some sales if the government export regulations remain or tighten.
Nvidia's financials could get a meaningful boost from sales of the alternative products for China
There are two main takeaways on this topic. One is that over the short term and probably the intermediate term, Nvidia doesn't need the China market for its data center platform to post astounding growth. There are plenty of entities in the U.S. and other countries that are eager to get a hold of Nvidia's AI-enabling products.
Second, given the China market's historically robust demand for Nvidia's data center products, the company's financial results should get a nice boost if its newly developed products for that market meet with only so-so or moderate success.
Currently, the alternative data center products for the China market are in the limited "sampling" stage, CEO Jensen Huang said. This is why the company expects Q1 fiscal 2025 data center sales to China to remain in the single-digit-percentage range. However, beyond Q1, Huang added that Nvidia will "do our best to ... succeed in that marketplace within the specifications of the restrictions."
Granted, China might not ever again account for 20% to 25% of Nvidia's data center sales. But, given the company's dominance in the data center artificial intelligence space, it seems likely that it will at least have some success in selling its new alternative products into the China market.
