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The backstory: Nvidia, a tech powerhouse in the chipmaking industry, has been making headlines this year. The company's stock price skyrocketed, tripling in value. In May, it became the first semiconductor company to hit a staggering US$1 trillion market valuation, joining the ranks of tech giants like Apple and Microsoft.
The reason for this big jump is the company's involvement in the world of artificial intelligence (AI). When the Microsoft-backed OpenAI's ChatGPT made its debut last year, it sent shockwaves across the tech world, drawing giants like Google, Microsoft and others into the AI arena. Nvidia has been riding that wave as the maker of some critical components that AI needs to function. In fact, even the "brain" behind ChatGPT is powered by Nvidia's graphics processing units (GPUs).
More recently. Last month, the US Biden administration introduced new export restrictions targeting cutting-edge chips and tools – specifically curbing their export to Chinese firms. Nvidia found itself in the crosshairs, especially concerning its A800 and H800 AI chips, which it had made exclusively for China after the first round of US export curbs on chips last year.
In response, Nvidia introduced three new AI chips tailored for the Chinese market – HGX H20, L20 PCIe and L2 PCIe.
The development: Nvidia's fiscal third quarter report card was released on Tuesday. The company crushed Wall Street's expectations with US$4.02 per share and US$18.12 billion in revenue. But, shares took a 1.5% dip after hours. While Nvidia’s earnings have been on a rally, Chief Financial Officer Colette Kress pointed out that these export restrictions are causing a significant sales decline in China. On top of that, the company’s networking business is headquartered in Israel. So it’s facing risks there because of the ongoing war with Hamas. Despite this setback, Nvidia is optimistic about growth in other sectors.
Breaking down the numbers, Nvidia's revenue for the quarter soared by 206%, reaching a net income of US$9.24 billion. The data center segment led with US$14.51 billion, while gaming contributed US$2.86 billion. Nvidia is eyeing US$20 billion in revenue for the fiscal fourth quarter, implying almost 231% revenue growth.
"Export controls will have a negative effect on our China business and we do not have good visibility into the magnitude of that impact even over the long term," said Chief Financial Officer Colette Kress during a conference call with analysts.
“We expect that our sales to these destinations will decline significantly in the fourth quarter of fiscal 2024, though we believe the decline will be more than offset by strong growth in other regions,” said Kress in a letter to shareholders.
"The company suggested the hit to sales from restrictions would be offset by other regions; however, there were scant details on this. It also begs the question, with margins so extraordinarily high currently, will these offsetting markets support such high margins?" said Capital.com analyst Kyle Rodda.