How U.S. AI chip export curbs threaten Nvidia’s revenue

Nvidia faces a significant revenue threat due to the latest U.S. export restrictions on artificial intelligence chips, designed to limit the global distribution of these coveted processors, analysts and investors said on Monday.

The regulations, among the strongest yet from the Biden administration, limit AI chip exports to most countries except for a select group of close U.S. allies.

They also maintain a block on exports to some countries, including China, as the U.S. tries to close regulatory loopholes and prevent Beijing from acquiring advanced chips that could bolster its military capabilities.

Surging demand for AI chips has catapulted Nvidia into the ranks of the world’s most valuable firms, with a market value exceeding $3 trillion. However, the new restrictions may complicate its ability to deliver the robust revenue growth that investors expect.

“These rules will significantly limit (Nvidia’s) market since as much as half its chips currently end up in countries that will be off-limits once the rules are applied,” said D.A. Davidson analyst Gil Luria.

Company filings show that Nvidia gets about 56% of its revenue from customers outside the U.S., with China making up about 17% of sales. Shares of the Santa Clara, California-based company were down around 2%.

The export curb “threatens to derail innovation and economic growth worldwide” and would “undermine America’s leadership,” Nvidia Vice President of Government Affairs Ned Finkle said.

Finkle argued America’s leading role in AI would be hurt because the rule “would impose bureaucratic control over how America’s leading semiconductors, computers, systems, and even software are designed and marketed globally.”

The rules were also criticized by others including the Semiconductor Industry Association, a lobbying group which said the move would force U.S. firms to cede market share to rivals.

“By limiting access to large quantities of advanced processors, the U.S. is effectively showing the world who’s the boss. However, in doing so, it also threatens to crimp the earnings potential for many American firms such as Nvidia,” said Dan Coatsworth, investment analyst at AJ Bell.

Analysts have been raising earnings estimates for Nvidia, outpacing its soaring share price growth. The forward price-to-earnings ratio is now about 31, compared to highs of over 80 in June 2023.

Big cloud providers likely winners

Under the new rules, major cloud providers such as Microsoft, Alphabet-owned Google and Amazon.com can apply for approval to bypass licensing requirements for AI chips, allowing them to establish data centers in countries affected by U.S. chip import restrictions.

As a result, these companies, already established as AI heavyweights, are likely to increase their market share, according to analysts.

“We have long viewed these companies as the gatekeepers of AI, anyway, given their financial ability to continually invest in next-gen large language models and massive installed bases,” said CFRA Research analyst Angelo Zino.

“The companies that have access to the most advanced chips (in this case, the big cloud providers) will have an advantage.”

Still, there are uncertainties surrounding the new rules because they are set to take effect 120 days from publication, giving the incoming Trump administration time to weigh in.

While the two administrations share similar views on China’s competitive threat, several analysts believe that President-elect Donald Trump would be more willing to negotiate deals with individual companies and countries.

“He (Trump) might tinker with the list of allies on the exemption list, but overall, the move is in step with Trump’s way of thinking,” Coatsworth said.

—Chris Sanders and Karen Freifeld, Reuters

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