Artificial intelligence chip leader Nvidia will likely deliver yet another blockbuster revenue forecast on Tuesday. But the real focus will be on whether widening U.S. curbs on sales of its high-end chips to China could hamper that run.
The results will also be a major test for the AI-powered rally that has helped drive up the U.S. stock market this year, with the Philadelphia semiconductor index up nearly 50% in 2023.
"There is an underlying assumption that Nvidia has total market dominance ... so anything that affects that perception, whether it be because of the business performance or because of risks to certain markets, that is going to temper enthusiasm," Capital.com analyst Kyle Rodda said.
The Biden administration last month banned China sales of the H800 and A800 chips that Nvidia had created after previous curbs on exports to the country. China is the company's third-largest market and accounts for more than one-fifth of its revenue.
Nvidia has said it does not expect any impact from the curbs in the near term. But its stock hit a near five-month low in October after a report by the Wall Street Journal said that up to $5 billion in Chinese orders were in jeopardy.
After a meteoric rally earlier this year that made it the first trillion-dollar chip firm, Nvidia's stock declined more than 12% between August and October, signaling investors were getting harder to impress as the China concerns mount.
Nvidia currently trades at 31 times its 12-month forward earnings estimates, compared with rival AMD's price-to-earnings ratio of 33.
CHINA CHIPS
Before the latest China export curbs, demand for Nvidia's H800 chip, a slower version of its flagship AI chip, had outpaced rivals as it was better than the alternatives.
Analysts have said the chip designer has now come up with three chips for the Chinese market and plans to release them soon.
"While the prior workarounds required only small changes to the memory bandwidth of the parts, this time around, the nature of the controls forces a sharp reduction in overall performance," Bernstein analyst Stacy Rasgon said in a note this month.
"However, they may still be attractive to Chinese customers, while being more palatable to U.S. regulators."
Nvidia is expected to report a nearly 173% jump in revenue for the third quarter, according to analysts polled by LSEG.
Wall Street estimates it will forecast an over 195% rise in revenue for the current quarter.
The company has also introduced a new top-of-the-line chip for AI called the H200, which comes with higher bandwidth memory and could help maintain its lead over AMD, competing with its upcoming MI300 chip.
Amazon Web Services, Google Cloud, Microsoft Azure and Oracle Cloud Infrastructure will be among the first cloud service providers to offer access to H200 chips, in addition to specialty AI cloud providers CoreWeave, Lambda and Vultr.
"It's possible Nvidia's massive growth will make revenue from China less material over time," Morningstar analysts said.
