Nvidia shares began to fall at the end of the trade session yesterday, possibly after the company warned that planned export restrictions on processors used for developing artificial intelligence (AI) could make the company lose around $400 million in revenue.
Today before the market open, at 13:30 GMT+3, its shares were losing nearly 6%, after it was revealed that the new A100 and H100 processor models would require US government approval to be sold in the Middle Kingdom. The US appears to be concerned that the chips could be used by the Chinese military, Nvidia said in a regulatory filing on Wednesday.
The company is now forecasting a drop in sales through declining demand and a recession. A day before the government notice, Nvidia released a forecast in which it announced a significant drop in shipments to reduce excess inventory.
The $400 million mentioned is about 6.8% of total Q3 2022 revenue (the financial year starts earlier than the calendar year). According to information provided to Bloomberg, Nvidia will seek to replace the A100 and H100 models with alternative products and announced that it will only seek a licence to sell if the replacements are insufficient to meet demand. It is worth noting that the restriction on the A100 and H100 will also prevent the sale of the DGX integrated system for training artificial intelligence algorithms.
Competitor Advanced Micro Devices (AMD) reported on Wednesday that it had received a similar notice. Despite this, the company stated that it does not expect the regulations to apply to its products, saying: "At this time, we do not believe that shipments of MI100 integrated circuits [most suitable for algorithm training] are impacted by the new requirements,". AMD shares at 13:30 GMT+3 lost around 2.5% before the market open.
The sector, after a major boost of cash from Congress to expand domestic manufacturing and subsidise research and development, has become the focus of further friction between the world's two largest economies. The current restrictions on the export of important technology may be the US response to recent threats from the Chinese Communist Party and the continued escalation of the situation in the South China Sea.
According to MarketScreener data, Nvidia currently has 46 recommendations, with four indicating downside movement and the rest pointing to the upside. However, 25 recommendations are still a 'strong buy'. The average target price is $216.68, which, given the last closing price, could suggest an upside of 42.7%. A substantial number of investment banks have recently lowered their target prices. Among them are Goldman Sachs, Deutsche Bank and Barclays. At the close of trading yesterday, less than US$151 per share was due.
Rafał Tworkowski, Junior Market Analyst, Conotoxia Ltd. (Conotoxia investment service)
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