Nvidia’s Stock Decline: The Impact of Political Developments on Future Growth

As Nvidia Corporation grapples with a significant setback in its China business, Wall Street analysts are evaluating the potential implications for the semiconductor giant’s growth trajectory. The recent announcement that the U.S. government will require a license for exports of its H20 chip to China, Hong Kong, and Macau has led to a projected write-off of approximately $5.5 billion in inventory for the April quarter.

The news sent Nvidia’s stock plunging by around 7% on Wednesday, raising questions about the company’s ability to sustain sequential growth amidst increasing political pressures. Melius Research analyst Ben Reitzes noted the clear signal from Nvidia’s decision to write off the chips, suggesting that the company does not anticipate receiving the necessary export licenses in the foreseeable future.

Assessing Nvidia’s Growth Potential

The critical question facing analysts is what this loss of revenue means for Nvidia’s future. Despite the challenges, some analysts remain optimistic about the company’s potential to achieve sequential growth this year. Reitzes expressed confidence that Nvidia could still capitalize on strong capital expenditure (capex) spending from major technology companies such as Google, Amazon, and Meta. He suggested that while Microsoft appears to be slowing in its data center buildouts, its spending on computing should remain robust.

Reitzes forecasts that Nvidia could see revenue upside in the April quarter, followed by 10% sequential growth in the July quarter and 7% sequential growth in the October quarter, fueled by the introduction of its new Blackwell architecture. A silver lining, as per Reitzes, is that the H20 chip likely generated lower growth margins compared to other graphics processing units (GPUs) within Nvidia’s extensive portfolio. This could lead to improvements despite the government restrictions.

Mixed Sentiments Among Analysts

Conversely, other analysts express more caution about Nvidia’s prospects. Jefferies analyst Blayne Curtis raised concerns about the company’s capability to achieve sequential growth throughout the year, especially given pre-existing worries around the relatively slow ramp-up of the GB200. Curtis indicated that the new political developments present a significant headwind for the company.

According to Curtis, more than half of the expected write-down is tied to finished goods or units that were nearing completion. This translates to an estimated $10 billion in revenue that will not be recognized, implying a potential $5 billion revenue shortfall in July when compared to April figures. He underscored the uncertainty regarding when this lost revenue would have been recognized.

Broader Risks from Export Regulations

Nvidia also faces looming risks stemming from the Biden administration’s potential implementation of artificial intelligence diffusion rules. Both Curtis and Bernstein’s Stacy Rasgon highlighted that these regulations may require non-U.S. customers to acquire licenses for purchasing substantial quantities of AI components. While Rasgon indicated that these new rules could be manageably incorporated into Nvidia’s operations, the timeline for processing the licenses is uncertain. This regulatory landscape could adversely affect the company’s outlook for both the fiscal second quarter as well as the latter half of the year.

This uncertainty is compounded by the recent developments surrounding the H20 chip export regulations, which have led Rasgon to reassess the previously low likelihood of these rules being implemented.

Conclusion

Nvidia’s recent challenges are a reflection of the complex intersection of technology and geopolitics. As analysts dissect the potential ramifications, it remains clear that the company’s resilience will be tested in the coming quarters. Whether Nvidia can adapt and maintain its growth trajectory will depend not just on internal execution but also on navigating the evolving political landscape surrounding technology exports. For investors and stakeholders, the forthcoming quarters will be pivotal as they await clarity on Nvidia’s strategy and its ability to weather the storm.