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Nvidia’s ‘China Syndrome’: Is the Stock Melting?

Nvidia's 'China Syndrome': Is the Stock Melting?

Much like the nuclear reactor in the 1979 movie “The China Syndrome,” Nvidia Corp.’s stock price and sales forecasts. melting, and a ban on sales of artificial intelligence chips to China is the latest addition to the temperature.

Nvidia NVDA,
-7.67%
shares hit a new 52-week low Thursday, falling a whopping 12% before closing with a 7.7% drop at $139.37, the seventh daily drop of more than 7% the stock has suffered so far this year. . Shares have fallen 22.2% in the past five trading sessions, their worst five-day period since November 23, 2018, when shares fell 28.4% in five sessions, according to data from Dow Jones.

With a 52.6% drop, Nvidia is the worst-performing chip stock in 2022 of the 30 that make up the PHLX Semiconductor Index SOX,
-1.92%,
that’s down 33.5% for the year. In comparison, the S&P 500 index SPX,
+0.30%
is down 17% and the tech-heavy Nasdaq Composite Index COMP,
-0.26%
has fallen by 24.7%.

Nvidia’s stock move on Thursday came after the chipmaker disclosed in a Securities and Exchange Commission filing late Wednesday that U.S. regulators are “imposing a new licensing requirement, effective immediately, for any future exports to China (including Hong Kong) and Russia.” of the company’s A100 and future H100 integrated circuits. DGX or other systems containing A100 or H100 integrated circuits and the A100X are also subject to the new licensing requirement.”

Full News: Nvidia Shares Drop After US Takes Measures to Restrict Data Center Sales in China

Analysts have already debated whether Nvidia was clear after the chipmaker lowered its outlook not for 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 is still wrong.

The short-term effect: About $400 million in projected revenue from China in the third quarter could be at risk. At the latest audit, analysts polled by FactSet predicted annual revenues averaging $28.09 billion, far from the $33.35 billion expected at the end of July and the $34.54 billion estimate at the end of February. Now analysts have to ask themselves if they should lower their targets again.

Read: Chip stocks could fall another 25% as ‘we enter worst semiconductor downturn in a decade,’ analyst says

“It feels sensible to take the affected China revenues out of our Nvidia numbers,” Bernstein analyst Stacy Rasgon said in a note titled “China syndrome?”

“The China Syndrome” depicted a nuclear reactor that would theoretically begin to burn toward the other side of the Earth, namely China. The previously little-known term quickly made its way into the American lexicon when the film made its debut on March 16, 1979, less than two weeks before the accident at the Three Mile Island Nuclear Power Plant near Middletown, Pennsylvania.

Rasgon acknowledged that the company is working on alternatives and has indicated it is seeking licenses for non-military customers, but said the timing and impact of these solutions is unclear. The new cut is “not trivial, but not an insurmountable blow either, although of course it is clearly an incremental negative as the business could be permanently affected,” he said.

Rasgon also noted that some AMD from Advanced Micro Devices Inc.
-2.99%
GPUs would also be affected by the ban. “However, sales of AMD’s data center GPUs are small and they do not foresee a significant impact on their business at this time,” Rasgon said. It has outperformed 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 total size of the products covered by the ban, and Nvidia will lose at least $2 billion in revenue by 2023 based on the measure. known constraints, even with a forecast of weak data center demand from China.

“We don’t know the broader implications of the restrictions, but the specific restrictions on A100 and H100 (basically training products introduced in the last 3 years) would say it affects new products,” wrote Moore, who is an line rating and a price target of $182 on Nvidia. “We suspect this is a limitation related to AI, so we wouldn’t expect an impact on non-AI chips, but we don’t know if the limitation is just GPUs, versus custom AI ASICs or special chips like Intel’s INTC,
-0.50%
Habana processors.”

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The restrictions can also cause problems outside of Nvidia. Citi Research analyst Atif Malik wrote that “we are seeing an escalation of US semiconductor restrictions to China and increased volatility for the semiconductor and equipment group,” while pulling Nvidia off the company’s positive “catalyst watch,” which was just on Friday. set.

Mizuho analyst Jordan Klein said he feels “negativity will spread widely across Semis about the following restrictions.”

This all 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 now two-year-old “Ampere” architecture amid a slump in consumer technology. In fact, Nvidia’s recent $1.22 billion inventory cost went to clear out much of that old inventory before the “Lovelace” launch.

Nvidia stocks were also the most actively traded on the S&P 500 index SPX,
+0.30%
on a preliminary volume of 117.3 million shares, with AMD shares a close second at over 94.5 million shares. The 52-week average daily volume of Nvidia shares is 49 million, while AMD’s is about 83 million.

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

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