NVIDIA: the licensing requirement for chips …

August 26 Nvidia (“Wide Moat”) announced that the US government is imposing a new licensing requirement for the sale of some of its data center graphics processing units (“GPUs”), namely the current generation A100 and the next generation H100, exported to China or Russia.

We note that Nvidia has not sold products to customers in Russia since the start of the war in Ukraine.

Nvidia’s major cloud customers include Chinese companies such asAli Baba, Tencent And Baidu for a variety of applications such as natural language processing, image recognition, and deep recommendation engines.

The goal of the new licensing agreement is to address the risks associated with the military end use of Nvidia’s AI-related chips amid mounting tensions between the US and China.

In a filing with the US stock market watchdog, the SEC, Nvidia pointed out that its revenue prospects for the fiscal third quarter included approximately $ 400 million in potential revenue for China that could be subject to the new tax requirement. license.

We believe that many end-use applications for Nvidia’s data center GPUs among Chinese customers are consumer-centric, so we believe the company should be able to license those customers.

Stock market drop

The company’s share price fell about 4% after the market after the news.

Although the stocks are trading at a discount to our fair value estimate of $ 200, we believe continued market volatility may create a more attractive entry point.

It should be noted that Chinese customer demand has been weak in the past few quarters due to the milder economic conditions in China linked to the COVID-19 blockade.

We reiterate our expectation of at least 40% growth in Nvidia’s data center segment this year, but if the company is unable to ship its data center processors to Chinese customers for an extended period, we will likely revise the results. our growth assumptions for this business.

We believe long-term investors should start to find Nvidia attractive, as we believe its data center business will prove relatively more resilient to macro challenges, although the developing situation with Chinese cloud customers is worrying.

Even taking into account weak demand in China, we expect Nvidia’s data center segment to grow sequentially every quarter during 2022, as customers such as Microsoft, Amazon And Alphabet invest in Nvidia’s A100 GPUs for internal and external workloads such as natural language processing and recommendation engines and Half it spends a lot to develop the infrastructure necessary for its metaverse offering.

The upcoming H100 family of GPUs (Hopper) is expected to deliver a performance boost over the A100 family, particularly in natural language and machine vision models, and should contribute significant fourth quarter revenue.

© Morningstar, 2022 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be construed as an invitation or encouragement to buy or sell listed securities. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information contained in this document should not be the only source for making an investment decision. Be sure to contact a financial advisor or financial professional before making any investment decisions.

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