Proactive Investors - China sales have been a concern for Nvidia Corp (NASDAQ:NVDA) even since the Biden administration placed export controls on high-spec artificial intelligence-grade hardware in late 2022.
Fearing that advanced computing chips like Nvidia’s bleeding-edge H100 design could supercharge the Communist Party’s military ambitions, these export controls threw a question mark over one of the Silicon Valley giant’s most lucrative markets.
“These items and capabilities are used by the PRC to produce advanced military
systems including weapons of mass destruction; improve the speed and accuracy of its military decision making, planning, and logistics, as well as of its autonomous military systems; and commit human rights abuses,” read the US government’s decree.
Things have only got stricter when it comes to selling hardware to China.
Biden implemented even further restrictions on AI chip exports exceeding specific performance thresholds to China last October.
In response, Nvidia has created new products to comply with these export restrictions; essentially less-powerful – and cheaper – variations of the group’s flagship H100 AI chip.
So what did yesterday's annual earnings call tell us about the scale of Nvidia's China problem?
Export restrictions had the effect of reducing Chinese data centre revenues (where AI chip sales are tallied) from 19% in fiscal year 2023 to 14% in fiscal year 2024.
Given the harsher Chinese export restrictions implemented last October, sales decreased substantially at the tail end of the reporting period.
Nvidia did not spin out the exact revenue mix for the fourth quarter specifically, but did provide this statement: “China represented a mid-single-digit percentage of our Data Center revenue in the fourth quarter of fiscal year 2024 due to USG (US Government) licensing requirements and we expect China to be in a similar range in the first quarter of fiscal year 2025.”
From 19% to 14% does not sound terrible, but from 14% to mid single digits has a more worrying ring to it, particularly if this will be the going trend in the financial year ahead.
Chief financial officer Colette Kress underscored the fact, telling shareholders that Chinese data centre revenues “declined significantly” following the additional October restrictions.
There are, of course, gaming revenues to consider, but at barely a fifth of firm-wide sales, they are hardly a failsafe.
Perhaps the China question is irrelevant.
“Accelerated computing and generative AI have hit the tipping point,” remarked Nvidia chief Jensen Huang in a statement. “Demand is surging worldwide across companies, industries and nations.”
China is a big market, but perhaps only a diminishing piece of an ever-increasing pie.
Besides, Nvidia guided firm-wide revenues of $24 billion for the current quarter, above previous estimates of $21.5 billion. Achieving that target would be another all-time record for the firm.
The market is cheering this guidance, with Nvidia shares expected to surge up to 15% when trades commence on Thursday.