Shares of semiconductor star Nvidia Corporation (NVDA -0.93%) slipped 2.1% through 11 a.m. ET on Tuesday after The Wall Street Journal reported that the company could lose as much as $5 billion in sales of semiconductor chips to China.
New U.S. export controls on the export of advanced technology to the People’s Republic are to blame.
When will this happen?
As the Journal explains, Nvidia has already completed 2023’s scheduled deliveries to China of advanced semiconductor chips for use in artificial intelligence. New restrictions on tech exports to China come into effect in mid-November, however, and Nvidia had hoped to squeak past the export ban by shipping some $5 billion worth of chips, previously scheduled to be delivered in 2024, early — before the rules come into force in a couple weeks — to AI customers including TikTok owner Bytedance, Baidu.com, and Alibaba Group.
Catching wind of the plan, however, the U.S. government informed Nvidia last week that the new regulations are actually effective immediately — and therefore the $5 billion in shipments cannot ship without prior authorization from the Department of Commerce.
How bad is this for Nvidia?
So what does this mean for Nvidia? Nvidia says “these new export controls will not have a meaningful impact in the near term” — although if you ask me, the loss of $5 billion in near-term sales does sound pretty meaningful. According to data from S&P Global Market Intelligence, $5 billion is more than 9% of the $54 billion in sales analysts had forecast for Nvidia next year.
And the longer term could be worse. In a separate statement made on another occasion, Nvidia’s CFO has admitted that if restrictions on exports are not lifted soon, they could cause a “permanent” loss of opportunities for U.S. businesses in China.
The reason: If Nvidia has chips, and China would like to buy them but cannot, then China will logically attempt to obtain chips from other companies — or develop advanced chips of its own. The alternative would be for China to abandon its goal of becoming a leader in artificial intelligence technology, and that’s not likely.
Simply put, if Nvidia isn’t allowed to grab a piece of the Chinese AI market now, that market share may no longer be up for grabs by Nvidia later, when export restrictions are eventually lifted. Thus, they pose a real threat to how big of a revenue base — and how big a market cap — Nvidia can ultimately attain.