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NVIDIA (NVDA - Free Report) has fallen from its throne as the King of AI among semiconductor companies.
In mid-August, my colleague Ben Rains profiled NVDA as the Bear of the Day because analysts were dramatically lowering EPS estimates ahead of the company report on August 24.
Word was that the Gaming segment was about to miss expectations.
A few things have occurred since. The good news is that Ben is away welcoming his second child into the world.
The bad news is all about NVDA where the quarterly results and outlook moved analysts to lower estimates further.
Then a week later, the chip maker revealed that the U.S. government told it to stop exporting top artificial intelligence chips to China.
Export Ban from Uncle Sam
Let's cover the juicy news first and then we'll see what the quarter and guidance did to sales and profit projections.
In a filing with the SEC, NVIDIA disclosed that the U.S. government informed it on Aug 26 about imposing a new licensing requirement, effective immediately, for its A100, A100X and forthcoming H100 integrated circuit sales in China. The government has also banned NVIDIA from exporting DGX or any other systems that incorporate A100 or H100 integrated circuits.
The new licensing requirements will also be implied on any future chip designs developed by NVIDIA that have a threshold greater than or equivalent to A100. Additionally, any systems developed in the future incorporating the aforementioned types and thresholds will also fall under export restrictions.
With the new licensing requirements, the U.S. government intends to "address the risk that the covered products may be used in, or diverted to, a 'military end use' or 'military end user' in China and Russia," per NVDA in the SEC filing.
Export Restrictions to Hurt NVIDIA’s Sales
NVIDIA's A100 and H100 are its highest-performance chips used in data centers for AI, data analytics and computing applications. Though the company does not sell products to customers in Russia, the new licensing requirements are going to significantly hurt its data center chip sales in China.
The newly imposed restrictions are likely to impact the company's ability to support the existing customers of A100 as well as complete the development of H100 timely. This could also require NVIDIA to transition some of its operations outside China.
The company warned that it may lose revenues if Chinese firms decide not to buy alternative NVIDIA products.
Q2 and the Outlook
The latest restriction is a new blow to NVIDIA, which is already being hurt by the weakening demand for its chips used in gaming products. Last week, the company reported revenues of $6.7 billion for the second quarter of fiscal 2023, much lower than its May 2022 forecast of $8.10 billion (+/-2%), due to weaker sales across its Gaming and Data Center business segments.
For the second quarter, NVIDIA reported non-GAAP earnings of 51 cents per share, which missed the Zacks Consensus Estimate by 8.9%. Moreover, the reported figure plunged 51% year over year and 63% sequentially.
NVIDIA's Gaming segment revenues plunged 33% year over year, reflecting reduced channel partner sales due to macroeconomic headwinds. Although Data Center revenues jumped 61% year over year, the company stated that sales were below expectations due to ongoing supply-chain disruptions and lower sales to China's hyperscale customers, who are affected by economic conditions.
Considering the current business environment, the company issued dim revenue guidance for the third quarter, wherein it expects to generate $5.9 billion (+/- 2%) in sales, approximately 17% lower than the year-ago quarter's revenues.
Looking at the latest U.S. government's restriction on chip sales to China, the company is highly probable to report third-quarter revenues meaningfully lower than its August 2022 guidance.
The Zacks EPS Consensus Drops
When Ben wrote his report a month ago, the EPS consensus for the full fiscal year 2023 (ends January) had dropped 21.5% from $5.47 to $4.29 since June.
Now, the number sits at $3.46, down another 19% in just a few weeks.
And for the coming year (FY'24 starts in Feb), the EPS consensus has been cut 15% from $5.37 to $4.55.
And while this year's topline could come in flat, barely crossing $27 billion, next year's growth projection has been reduced to just 15%.
Bottom line on NVDA: A great buying opportunity could be coming up as these storm clouds pass in a quarter or two. The Zacks Rank will let us know when the estimates stabilize.
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Bear of the Day: NVIDIA (NVDA)
NVIDIA (NVDA - Free Report) has fallen from its throne as the King of AI among semiconductor companies.
In mid-August, my colleague Ben Rains profiled NVDA as the Bear of the Day because analysts were dramatically lowering EPS estimates ahead of the company report on August 24.
Word was that the Gaming segment was about to miss expectations.
A few things have occurred since. The good news is that Ben is away welcoming his second child into the world.
The bad news is all about NVDA where the quarterly results and outlook moved analysts to lower estimates further.
Then a week later, the chip maker revealed that the U.S. government told it to stop exporting top artificial intelligence chips to China.
Export Ban from Uncle Sam
Let's cover the juicy news first and then we'll see what the quarter and guidance did to sales and profit projections.
In a filing with the SEC, NVIDIA disclosed that the U.S. government informed it on Aug 26 about imposing a new licensing requirement, effective immediately, for its A100, A100X and forthcoming H100 integrated circuit sales in China. The government has also banned NVIDIA from exporting DGX or any other systems that incorporate A100 or H100 integrated circuits.
The new licensing requirements will also be implied on any future chip designs developed by NVIDIA that have a threshold greater than or equivalent to A100. Additionally, any systems developed in the future incorporating the aforementioned types and thresholds will also fall under export restrictions.
With the new licensing requirements, the U.S. government intends to "address the risk that the covered products may be used in, or diverted to, a 'military end use' or 'military end user' in China and Russia," per NVDA in the SEC filing.
Export Restrictions to Hurt NVIDIA’s Sales
NVIDIA's A100 and H100 are its highest-performance chips used in data centers for AI, data analytics and computing applications. Though the company does not sell products to customers in Russia, the new licensing requirements are going to significantly hurt its data center chip sales in China.
The newly imposed restrictions are likely to impact the company's ability to support the existing customers of A100 as well as complete the development of H100 timely. This could also require NVIDIA to transition some of its operations outside China.
The company warned that it may lose revenues if Chinese firms decide not to buy alternative NVIDIA products.
Q2 and the Outlook
The latest restriction is a new blow to NVIDIA, which is already being hurt by the weakening demand for its chips used in gaming products. Last week, the company reported revenues of $6.7 billion for the second quarter of fiscal 2023, much lower than its May 2022 forecast of $8.10 billion (+/-2%), due to weaker sales across its Gaming and Data Center business segments.
For the second quarter, NVIDIA reported non-GAAP earnings of 51 cents per share, which missed the Zacks Consensus Estimate by 8.9%. Moreover, the reported figure plunged 51% year over year and 63% sequentially.
NVIDIA's Gaming segment revenues plunged 33% year over year, reflecting reduced channel partner sales due to macroeconomic headwinds. Although Data Center revenues jumped 61% year over year, the company stated that sales were below expectations due to ongoing supply-chain disruptions and lower sales to China's hyperscale customers, who are affected by economic conditions.
Considering the current business environment, the company issued dim revenue guidance for the third quarter, wherein it expects to generate $5.9 billion (+/- 2%) in sales, approximately 17% lower than the year-ago quarter's revenues.
Looking at the latest U.S. government's restriction on chip sales to China, the company is highly probable to report third-quarter revenues meaningfully lower than its August 2022 guidance.
The Zacks EPS Consensus Drops
When Ben wrote his report a month ago, the EPS consensus for the full fiscal year 2023 (ends January) had dropped 21.5% from $5.47 to $4.29 since June.
Now, the number sits at $3.46, down another 19% in just a few weeks.
And for the coming year (FY'24 starts in Feb), the EPS consensus has been cut 15% from $5.37 to $4.55.
And while this year's topline could come in flat, barely crossing $27 billion, next year's growth projection has been reduced to just 15%.
Bottom line on NVDA: A great buying opportunity could be coming up as these storm clouds pass in a quarter or two. The Zacks Rank will let us know when the estimates stabilize.