Nvidia Expects China Sales Drop, But Beats Revenue Targets; Israel Conflict Poses Risks
Chip designer Nvidia has forecasted a steep decline in fourth-quarter sales in China due to new US export rules, while announcing overall revenue expectations above Wall Street targets. The company, whose graphics processing units dominate the AI market, anticipates negative impacts on its China business as a result of the expanded US export controls. These controls limit what Nvidia can sell to China, and the affected chips accounted for nearly a quarter of the company’s data center sales in recent quarters. Nvidia’s CFO, Colette Kress, expressed uncertainty about the magnitude and long-term effects of the export restrictions on the company’s China operations.
Nvidia’s stock experienced a 1.5% decline in volatile after-hours trading following the announcement. The chip giant also faces additional risks in Israel, where its networking business is headquartered. Amid the ongoing conflict in Gaza, Nvidia’s networking unit, which supplies gear for AI supercomputers, saw a remarkable 155% increase in sales year-on-year. However, Kress revealed that a significant number of Nvidia’s employees based in Israel have been called up for active military duty. Should the war continue, their absence could potentially impact the company’s future operations.
Despite the challenges in China and Israel, Nvidia expects improved supply for its AI chips as it takes steps to ensure factory priority through prepayment. The increasing demand for AI servers, which have seen a 40% shipment increase this year, has prompted Nvidia to outsource manufacturing to contract chipmakers like TSMC. The company’s Chief Financial Officer forecasts adjusted gross margins of 75.5% for the fourth quarter, exceeding analyst estimates. However, the uncertainty surrounding Nvidia’s China operations may pose difficulties in maintaining these margins.
To tackle the newest round of US export rules, Nvidia has developed three new products specifically for the Chinese market. Nonetheless, industry analyst Jacob Bourne warns that these chips could divert vital research resources and may face the risk of being banned, similar to Nvidia’s initial round of China market chips. US officials introduced a new batch of export restrictions in October, reserving the right to update them as necessary.
Last week, Nvidia unveiled the H200, a new AI chip that is expected to deliver superior performance compared to its predecessor, the H100. The H200 incorporates additional high-bandwidth memory, a costly component that determines how efficiently the chip can process data. Rival tech company Advanced Micro Devices had previously emphasized the amount of high-bandwidth memory in its competing AI chips.
Several major tech companies, including Google, Amazon, and Microsoft, have started producing AI chips in-house in addition to purchasing Nvidia’s hardware for their data centers. Custom-designed chips offer these cloud giants the ability to include features tailored to their specific AI needs, despite requiring significant investment and development time. Microsoft recently unveiled two customized computing chips, one of which is capable of running large language models.
While Nvidia faces challenges in China, Chinese tech company Huawei’s AI chip is gaining traction among local firms due to difficulties in accessing Nvidia chips as a result of US pressure. Nvidia’s outlook, though affected by geopolitical factors, still exceeded revenue expectations. Adjusted third-quarter revenue tripled to $18.12 billion, beating the average estimate, with significant growth observed in the data center and gaming revenue sectors.
In conclusion, Nvidia anticipates a decline in Chinese sales due to new US export controls, while maintaining overall revenue targets above expectations. The company faces risks not only in China but also in Israel, where its networking business operates amid a conflict in Gaza. Despite these challenges, Nvidia expects improved supply for its AI chips, as it takes steps to secure factory priority. The chipmaker continues to innovate, introducing new products specifically designed for the Chinese market and unveiling the H200 AI chip, which promises superior performance. Major tech companies are also exploring the creation of custom-designed AI chips, despite the challenges and costs associated with their development. While China poses challenges for Nvidia, Huawei’s AI chip gains popularity in the domestic market due to difficulties in accessing Nvidia chips caused by US pressure.
