The U.S. government has charged multiple people connected with Super Micro Computer (SMCI 5.04%) with smuggling Nvidia (NVDA +0.14%)'s advanced chips to China, including Wally Liaw, a co-founder of Super Micro. Given the close relationship between the two companies, it's not surprising that Nvidia's stock has been falling amid these concerning developments.
While there's no reason to believe the tech company is involved in any wrongdoing, it would suggest that at least some of its growth can be attributed to the Chinese market -- something that investors have largely assumed hasn't been the case. Here's why this can be a big problem for the tech giant.
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Why Super Micro's troubles could weigh on Nvidia
Investors have been bullish on Nvidia's stock due to the expectation that there is much more growth to come from the business in the future. And one market that has been largely off-limits of late but that has been seen as a potentially lucrative growth opportunity for Nvidia is China. Last year, CEO Jensen Huang estimated that the overall artificial intelligence (AI) market in China could reach $50 billion within the coming years.
For Nvidia, China has represented a huge growth opportunity, and that has enabled investors to remain fairly bullish about its long-term prospects, given that it's doing so well without a huge market to tap into just yet. But if people connected with Super Micro have truly been diverting billions of dollars' worth of chips to China, then Nvidia's growth would effectively factor in a piece of the Chinese market, even if the alleged figure is relatively modest at around $2.5 billion. The bigger risk, however, may be that the U.S. government puts in more restrictive measures on the Chinese market in light of this scandal. Earlier this year, it had allowed the sale of certain chips to China.
NASDAQ: NVDA
Key Data Points
Is Nvidia's stock destined to go lower this year?
Shares of Nvidia are down 10% this year, but they are still nowhere near their 52-week lows of less than $87. Investors have grown concerned about high-valued tech stocks of late, and Nvidia is proving to be no exception. At a price-to-earnings multiple of 34, its valuation has come down a bit (it has traded at well over 50 times earnings within the past year), but it's still not showing any signs of rallying just yet. And news of a smuggling scandal involving may only give investors more of a reason to remain bearish.
As a long-term investment, however, Nvidia's stock may be worth adding to your portfolio. While there is some short-term risk here, the opportunities in AI remain massive, and Nvidia's chips are likely to remain in high demand for the foreseeable future. The stock might still dip lower as the year goes on, but I also wouldn't be surprised if it bounces back.
