Nvidia (NVDA.O) is expecting a steep drop in fourth-quarter sales in China due to new U.S. export rules. However, the company is still forecasting overall revenue above Wall Street targets as supply-chain issues ease.
Nvidia’s China Troubles
The new U.S. export rules are expected to have a significant impact on Nvidia’s sales in China. The company said that sales of the affected chips made up nearly a quarter of its datacenter sales in the past few quarters.
“Export controls will have a negative effect on our China business, and we do not have good visibility into the magnitude of that impact even over the long term,” Chief Financial Officer Colette Kress said during a conference call with analysts.
Nvidia is developing newly compliant chips for China, but those won’t materially contribute to fourth-quarter revenue.
Other Risks
Nvidia is also facing risks in Israel, whose military is embroiled in a conflict in Gaza and where Nvidia’s networking business is headquartered. Sales from that unit, whose gear is used in AI supercomputers, rose 155% from a year ago. Kress said the networking business exceeds a $10 billion annualized run rate.
The chipmaker said a significant portion of its employees based in Israel have been called up to active military duty, and if the war continues, their absence could hurt its future operations.
Despite Challenges, Nvidia Exceeds Expectations
Despite the challenges in China and Israel, Nvidia is still forecasting overall revenue above Wall Street targets for the fourth quarter. The company is expecting revenue of $20 billion, plus or minus 2%. Analysts polled by LSEG expect revenue of $17.86 billion.
Adjusted third-quarter revenue tripled to $18.12 billion, ahead of an average estimate of $16.18 billion. Data center revenue jumped 41% to $14.51 billion, while gaming revenue rose 15% to $2.86 billion.
Excluding items, the company earned $4.02 per share, beating estimates of $3.37 a share.
Nvidia’s Response
In response to the newest round of U.S. export rules, Nvidia has already come up with three new products for the Chinese market.
However, Jacob Bourne, analyst at Insider Intelligence, said that Nvidia’s move to develop specialized chips for the Chinese market could end up being banned just like its first round of China market chips.
“Nvidia’s move to develop specialized chips for the Chinese market, while a strategic response to export restrictions, faces challenges”
Jacob Bourne
U.S. officials unveiled a new batch of restrictions in October and said they will continue to update them as needed.
The Future of Nvidia
Nvidia is still a dominant player in the AI chip market, but the company is facing increasing competition from rivals AMD and major tech companies including Alphabet’s Google, Amazon.com and Microsoft, which have announced AI chips produced by in-house design teams in addition to purchasing Nvidia’s hardware for their own data centers.
Building custom chips can cost hundreds of millions of dollars and take years, but gives the major cloud companies the ability to include features tied specifically to their AI needs.
Microsoft unveiled a duo of custom-designed computing chips earlier this month, one of which can run large language models.
Chinese tech company Huawei’s AI chip is also gaining traction from local firms as U.S. pressure makes it hard to access Nvidia chips.
It remains to be seen how Nvidia will respond to these challenges, but the company is well-positioned for the long term. The AI market is expected to continue to grow rapidly, and Nvidia is a leader in this market.
FAQ
The new U.S. export rules are expected to have a significant impact on Nvidia’s sales in China. The company said that sales of the affected chips made up nearly a quarter of its datacenter sales in the past few quarters.
Nvidia is developing newly compliant chips for China, but those won’t materially contribute to fourth-quarter revenue.
Nvidia is also facing risks in Israel, whose military is embroiled in a conflict in Gaza and where Nvidia’s networking business is headquartered. Sales from that unit, whose gear is used in AI supercomputers, rose 155% from a year ago. Kress said the networking business exceeds a $10 billion annualized run rate.
It remains to be seen how Nvidia will respond to the challenges it faces, but the company is well-positioned for the long term. The AI market is expected to continue to grow rapidly, and Nvidia is a leader in this market.
