The Nvidia Call was very close

Being on top isn’t always what it’s cracked up to be.

Nvidia NVDA -2.08%

helped pioneer the use of graphics processors once used primarily for video games in powerful chips that now enable artificial intelligence capabilities in data centers. She reinvented her own business in the process. Annual revenue is up more than five times from before the data center business began to take off in 2016. Nvidia also became the world’s most valuable semiconductor company, with a market capitalization higher than at least five other chip companies that produce more annually revenue basis.

But the past month has wreaked havoc on this position. The company’s previously announced results for its fiscal second quarter on Aug. 8 and its subsequent report for the period two weeks later showed the chipmaker’s business being hit hard by rising inventories and slipping demand—particularly in its core segment video games. And Nvidia’s warning last week that it might not be able to sell some of its data center chips to China made the situation even worse.

The stock is now down 28% since the pre-announcement on Aug. 8, and its 54% year-to-date loss is the worst in the PHLX Semiconductor Index. Nvidia’s market capitalization is also second in the index, about 20% lower than that of Taiwan Semiconductor Manufacturing.

This makes for an interesting setup for Nvidia ahead of what is expected to be a major product launch this fall. A new graphics chip, or GPU, called Hopper, comes alongside a central processing unit, or CPU, called Grace. Both are aimed at the data center market, and Grace will be Nvidia’s first CPU entry into this space. The latter has its work cut out for it as it will challenge established positions from Intel and Advanced Micro Devices in this segment. But the first — Hopper — is expected to be a major component of Nvidia’s data center sales later this year.

CEO Jensen Huang said on the company’s Q2 call on Aug. 24 that “we expect to ship significant Hoppers in Q4.” Wall Street expects data center sales of just over $4 billion in that fiscal period ending in January.

But its launch had a close call: In a filing after the U.S. market closed on Aug. 31, Nvidia said the Hopper — which it called the H100 in the document — is one of two data center chips that now require a license from the US government for any future exports to China and Russia. Nvidia also said the new rules “may affect the Company’s ability to complete development of the H100 in a timely manner.” A filing early the next morning said Nvidia had received the necessary government approvals to continue development of the chip, but did not change its warning about sales restrictions in China.

Investors were not reassured. Nvidia’s share price opened Thursday down 6% even after the second filing and had fallen a full 10% by Friday. Nvidia has warned that the sales restrictions could cause a $400 million hit to revenue in the current fiscal third quarter, which is about 7% of its full forecast for the period.

Cowen analyst Matthew Ramsay had written in a note before Nvidia’s second filing that if development of the Hopper chip is delayed, “the negative effects would likely be much greater” than the $400 million Nvidia had set for the current quarter.

Data centers are expected to continue to be a major growth driver for Nvidia. American tech giants like Amazon.com,

Microsoft and Google are major buyers of the company’s chips to power their cloud-computing services, and Mr. Huang says such customers are “dying” to get their hands on the Hopper chip. But even the cash-rich cloud giants are feeling the sting of the global economic slowdown and are showing early signs of moderating their spending.

Nvidia’s data center business is expected to average 29% year-over-year revenue growth over the next three fiscal years, compared with an average of 62% over the past three, according to FactSet.

Dodging a bullet with its newest chip won’t prevent Nvidia from being hurt by a downturn.

Write to Dan Gallagher at dan.gallagher@wsj.com

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