Driven by the huge opportunity represented by the rise of AI and use of its best-in-class chips, Nvidia (NASDAQ:NVDA) has been one of the year’s best performers, with the stock joining the exclusive $1 trillion market-cap club while delivering year-to-date gains of 182%.
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However, this week offered a different story, and the stock took a bit of a slap in the face, retreating by ~9%. The negativity was a result of an update by the US government regarding the export controls on semiconductor capital equipment and AI chips to China. To hinder its access to advanced semiconductor tech, last October, the US government placed restrictions on the products allowed to be sold and prohibited the sale of chips above a threshold of compute performance (teraflops) and connectivity.
Since both A100 and H100 products were above the threshold, Nvidia was impacted by the decision. The company worked around the limitations, introducing alternatives to those products with slightly lowered compute and meaningfully reduced NVLink connectivity, calling them the A800 and H800.
The most recent action is designed to address identified weaknesses in the export regulations introduced a year ago. It retains the teraflop restriction while introducing a fresh criterion known as “performance density,” which measures gigaflops per square millimeter of silicon, and this will also have limitations. Additionally, certain products that fall into a somewhat uncertain category below these thresholds, which may include certain gaming products, will now require licensing.
Morgan Stanley analyst Joseph Moore is surprised by the severity of the update. “While export controls have been widely expected given recent press reports, this is at the more draconian end of expectations, in our view, and the selloff in the stock seems warranted,” the 5-star analyst said. “We were expecting a tightening of specifications, but the broad based license requirements in the gray area create more material uncertainty for a region driving 20-25% of demand.”
That said, in a statement released following the update, Nvidia said that “given the demand worldwide for our products, we don’t expect a near-term meaningful impact on our financial results.”
That is a sentiment echoed by Moore, who says that despite the “significant setback,” business is likely to “continue to exceed expectations” and that Nvidia “continues to be our Top Pick in semis.”
Moore already considered his CY24 estimates to be on the cautious side, partly because he anticipated the implementation of these export controls. That said, the stricter controls are a setback, as they do reduce some of the potential upside he had modeled. “However our industry contacts do not expect this situation to be overly disruptive as long as the new performance threshold – not the licensing – is the primary criterion,” he further added.
The upshot of all the above is that Moore sticks with an Overweight (i.e., Buy) rating on NVDA shares, although the price target is lowered from $630 to $600. Nevertheless, there’s still upside of 45% from current levels. (To watch Moore’s track record, click here)
On the Street, barring one skeptic, all 37 other recent ratings are positive, naturally providing the stock with a Strong Buy consensus rating. Going by the $645.53 average target, a year from now shares will be changing hands for a 56% premium. (See Nvidia stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
