Nvidia’s ‘China Syndrome’: Is the stock melting?

Like the nuclear reactor in the 1979 movie “The China Syndrome,” Nvidia Corp.’s stock price and sales forecasts. have fallen, and China’s ban on sales of artificial intelligence chips is the latest to worsen the temperature.

Nvidia NVDA,
-7.67%
Shares hit a new 52-week low on Thursday, falling as much as 12% before closing down 7.7% at $139.37, the stock’s seventh daily drop of more than 7% so far this year. Shares have fallen 22.2% collectively over the past five sessions, their worst five-day period since Nov. 23, 2018, when shares fell 28.4% over five sessions, according to Dow Jones data.

Down 52.6%, Nvidia is 2022’s worst-performing chip stock of the 30 that make up the PHLX Semiconductor Index SOX,
-1.92%,
down 33.5% for the year. By comparison, the S&P 500 SPX,
+0.30%
the tech-heavy Nasdaq Composite Index COMP is also down 17%,
-0.26%
down 24.7%.

Nvidia’s stock move on Thursday came after the chip maker disclosed in a Securities and Exchange Commission filing late Wednesday that U.S. regulators are imposing “a new permit requirement, effective immediately, for any future export by the company to China ( including Hong Kong) and Russia. A100 and future H100 ICs. DGX or any other systems incorporating A100 or H100 ICs and the A100X are also covered by the new license requirement.”

Full News: Nvidia shares fall after US moves to curb sales of its data centers to China

Analysts already debated whether Nvidia was in the clear after the chipmaker cut its outlook for not the first, not the second, but the third time in as many months. Now, for the fourth time this year, Nvidia is suggesting to analysts that its revenue forecast could still be off.

The short-term result: About $400 million in expected third-quarter revenue from China could be at risk. At last check, analysts surveyed by FactSet were forecasting annual revenue of $28.09 billion on average, far short of the $33.35 billion expected at the end of July and the $34.54 billion estimate at the end of February. Now, analysts are being forced to consider whether they should cut their targets again.

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“It is prudent to remove China-affected revenue from our Nvidia numbers,” Bernstein analyst Stacy Rasgon said in a note titled “China Syndrome?”

The “China Syndrome” depicted a nuclear reactor that would theoretically start burning its way to the other side of the earth, namely China. The then-little-known term quickly found its way into the American lexicon as the film debuted on March 16, 1979, less than two weeks before the accident at the Three Mile Island nuclear power plant near Middletown, Pa.

Rasgon acknowledged that the company is working on alternatives and has expressed its desire to seek permits for civilian customers, but said the timing and impact of those remedies, however, is unclear. The new cut “is not insignificant, but not an insurmountable blow, although of course it is clearly an incremental negative as the business may be permanently damaged,” he said.

Rasgon also noted that some of Advanced Micro Devices Inc.’s AMD
-2.99%
GPUs will also be affected by the ban. “However, AMD’s data center GPU sales are small and do not foresee any significant impact on their business at this time,” said Rasgon. He has outperform ratings on both stocks with a price target of $180 on Nvidia and $135 on AMD.

However, the effects of the ban could last well beyond the current quarter. Morgan Stanley analyst Joseph Moore said he expects regulators to take 18 to 24 months to determine the full range of products affected by the ban, and Nvidia stands to lose at least $2 billion in 2023 revenue based on the known limitations, even with a forecast for weak data center demand from China.

“We don’t know the broader implications of the restrictions, but the specific restrictions on the A100 and H100 (core training products introduced in the last 3 years) would suggest that this affects new products,” wrote Moore, who has an embedded rating and price target of 182 $ to Nvidia. “We’d assume this is an AI-related limitation, so we wouldn’t expect consequences for non-AI chips, but we don’t know if the limitation is GPU-only, versus custom AI ASICs, or specialized chips like Intel’s INTC chips,
-0.50%
Editors Habana.”

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The restrictions could also cause problems beyond Nvidia. Citi Research analyst Atif Malik wrote that “we see an escalation of US semiconductor restrictions in China and increased volatility for the semiconductor and equipment group,” while removing Nvidia from the company’s positive “catalyst watch,” which just was enacted on Friday.

Mizuho analyst Jordan Klein said he felt “the negativity will be widespread throughout the half as to what restrictions could come next.”

All this comes ahead of Nvidia’s big GTC conference starting on September 19, where the company is expected to unveil its next-generation ‘Lovelace’ chip architecture to replace the two-year-old ‘Ampere’ architecture in a consumer tech slump. In fact, Nvidia’s recent $1.22 billion inventory charge went toward clearing out a lot of that old inventory ahead of “Lovelace’s” release.

Nvidia stock was also the most actively traded on the S&P 500 SPX,
+0.30%
on preliminary volume of 117.3 million shares, with AMD shares a close second at more than 94.5 million shares. Nvidia’s 52-week average daily share volume is 49 million, while AMD’s is around 83 million.

Of the 44 analysts covering Nvidia, 35 have a buy rating, eight have a sell rating and one has a sell rating. Of those, six cut their price targets on the stock, resulting in an average price target of $210, down from $237.50 a month ago.

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