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Saturday, March 2, 2024

Nvidia (NVDA) Stock Dips on U.S.-China Chip Restrictions

Nvidia (NVDA) Stock Dips on U.S.-China Chip Restrictions

Source: Michael Vi / Shutterstock.com

After inking a blistering print in the charts this year, Nvidia (NASDAQ:NVDA) stock is suffering a significant blow to its bullish narrative. Earlier today, the U.S. Department of Commerce stated that it would significantly constrict exports of artificial intelligence (AI) chips, according to a report by The Wall Street Journal. While Nvidia management has put on a brave face, conflicting internal statements are also casting a cloud over NVDA stock.

With the Commerce Department’s announcement, it will be much more difficult for U.S. companies like Nvidia and rival Intel (NASDAQ:INTC) to sell existing products in China. Additionally, semiconductor firms will likely encounter roadblocks to introducing new chips to sidestep the regulations.

As WSJ states, this latest move targets “perceived loopholes” in export controls that the federal government announced back in 2022. Naturally, that measure escalated tensions with China, a top market for AI and machine learning (ML) related products.

According to U.S. Secretary of Commerce Gina Raimondo, the intent of the new restrictions is to curb China’s access to “advanced semiconductors that could fuel breakthroughs in artificial intelligence and sophisticated computers.” With AI playing a vital role in Chinese military applications, the U.S. has serious concerns about falling behind in defense technologies.

Still, such rhetoric is unlikely to satisfy NVDA stock investors. Indeed, the U.S.-based Semiconductor Industry Association has already criticized the new rules, highlighting “overly broad, unilateral controls [that] risk harming the U.S. semiconductor ecosystem without advancing national security.”

The Impact on NVDA Stock Becomes Hotly Debated

Notably, Nvidia management has put on a brave face when it comes to the potential negative impact of this news to NVDA stock. “We comply with all applicable regulations while working to provide products that support thousands of applications across many different industries,” a company spokesperson told Seeking Alpha. The spokesperson also emphasized that, because of strong global demand for its products, Nvidia doesn’t expect a “near-term meaningful impact” on its financial results.

On paper, that may seem like a solid endorsement for the forward-looking bullish thesis of NVDA stock. However, WSJ points out that earlier statements by Nvidia contradict the current framing of the problem. Specifically, Chief Financial Officer Colette Kress said in June that long-term restrictions on China “will result in a permanent loss of opportunities for the U.S. industry to compete.”

Adding to the argument, Kress noted that the impact of Nvidia’s future business and financial results depends on China. And that’s not an alarmist concept. While experts project the U.S. to dominate the global AI sector, the Chinese AI market may exceed $26 billion by 2026. Hardware — the very kind that Nvidia sells — is also predicted to make up 56% of the Chinese AI market.

Why It Matters

So far, analysts don’t appear to be fazed by the announcement, although that may change in the future. For now, analysts peg NVDA stock as a consensus strong buy. This assessment breaks down as 37 buy ratings and one hold rating. Overall, the average price target for Nvidia stock lands at $650.53 per share, implying roughly 41% upside potential.

On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.

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