Advances in artificial intelligence (AI) have led to rising share prices in a broad cross-section of the market this year, but no stock has been more profoundly impacted than Nvidia (NVDA 0.25%). While macroeconomic headwinds weighed on the chipmaker's performance last year, its 2023 has so far been stellar.
Advancements in large language models (LLMs) and widespread efforts to adopt generative AI have resulted in surging demand for the cutting-edge semiconductors required to power the technology. Nvidia produces most of those chips, and its ballooning sales figures sent the stock soaring.
New export controls announced by the Biden administration this week could weigh on Nvidia's rebound, but shareholders shouldn't panic.
Image source: Getty Images.
New restrictions
The Biden administration announced additional restrictions on the sale of high-performance semiconductors and chipmaking equipment this week that affect many of Nvidia's most advanced AI processors. The Department of Commerce significantly expanded the licensing requirements that were put in place last year in an effort to limit the development of AI used in military applications.
The additional restrictions will not only apply to Nvidia's A100 and H100 graphics processing units (GPUs), which are primarily used in data centers and AI applications, but also to the A800 and H800 chips Nvidia developed in response to last year's restrictions. The new licensing requirements also apply to the RTX 4090 AI graphics chip and any systems that integrate any of the aforementioned processors.
Regulators have taken this extraordinary step to address concerns that this cutting-edge technology could be used against the U.S. or its allies in weapons and systems under development by foreign powers.
In order to address these issues, the Commerce Department will require Nvidia and other chipmakers to apply for government licenses when selling high-end semiconductors to customers in an expanded list of foreign countries. The list, which originally included China, Hong Kong, and Russia, now includes 40 countries under U.S. arms export restrictions, including Saudi Arabia, the United Arab Emirates, and Vietnam.
Déjà vu all over again
With apologies to Yogi Berra, "It's like déjà vu all over again." This marks the second such revision of rules first introduced in August 2022, which restricted the sale of Nvidia's most advanced processors to China and Russia. The company quickly developed alternative processors -- namely the A800 and H800 -- that were just slow enough to be exportable under the tightened rules.
The latest restrictions, however, focus less on speed and more on performance, and cover "integrated circuits exceeding certain performance thresholds," according to Nvidia's regulatory filing. Given the revised guidelines, investors shouldn't expect a replay of last year's pivot by Nvidia.
Nvidia's responses then and now
Nvidia's regulatory filings provide important context for this situation that should help put investors' minds at ease.
When the export controls were initially unveiled last year, Nvidia said the new rules could impact approximately $400 million in potential sales to China during the quarter. At the time, that amounted to roughly 7% of the company's total quarterly revenue of $5.9 billion.
Management's current response is far more telling. In a regulatory filing that dropped Tuesday, Nvidia hinted at the strong and accelerating demand for AI processors, saying, "Given the strength of demand for our products worldwide, we do not anticipate that the additional restrictions will have a near-term meaningful impact on our financial results."
This suggests that demand is so strong that investors likely won't even notice the $400 million (or more) loss in quarterly revenue from those restricted markets, as that hardware will be purchased by customers elsewhere.
Context matters
It's important to remember that Nvidia has a virtual monopoly for the processors used to power AI. While estimates vary, it's been suggested that Nvidia commands between 80% and 95% of the AI chip market. This puts Nvidia on the leading edge of a once-in-a-generation shift, supplying the cutting-edge semiconductors needed to enable AI platforms to operate effectively.
Wedbush analyst Dan Ives recently called AI the "fourth industrial revolution," suggesting that it could represent an $800 billion opportunity over the coming decade -- and his estimate is among the most conservative. For contrast, Morgan Stanley and Goldman Sachs estimate the AI opportunity at $6 trillion and $7 trillion, respectively, by 2030.
To be clear, it's impossible to know just what the implications of these rules will ultimately be. Since the new restrictions were announced, Nvidia stock has shed roughly 10% of its value (as of this writing), and the share price declines could be just beginning. Some investors tend to have short attention spans and take a "shoot first and ask questions later" approach to investing -- which helps explain the stock's current trajectory.
Long-time Nvidia shareholders will know that the company has an uncanny knack for developing common-sense solutions to seemingly problematic issues and anticipating secular market trends. For example, the company leveraged the parallel processing capabilities of GPUs originally used by gamers, resulting in significant advances for both cloud computing and AI.
Despite short-term challenges and the resulting volatility, investors should keep their eyes focused firmly on the future -- as Nvidia's stock price could be many times larger five to 10 years down the road.
