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The negative reaction was due to an update from the US government regarding export controls on semiconductor capital equipment and AI chips to China. To limit China’s access to advanced semiconductor tech, last October the US prohibited the export of chips above certain thresholds of compute performance (teraflops) and connectivity.
Table of Contents:
- Nvidia’s China Dependence
- Export Control Update Details
- Morgan Stanley’s Surprise But Reaffirmed Bullish Stance
- Long-Term Growth Drivers Intact
- Key Takeaways for Investors
As both Nvidia’s A100 and H100 products exceeded the thresholds, the company was impacted by the US decision. Nvidia introduced alternative products A800 and H800 to work around the limitations by lowering compute and connectivity.
The most recent update introduces a new criteria of “performance density” limiting gigaflops per mm2 of silicon. It also requires licensing for uncertain products like gaming chips. This appears to be a more severe limitation than expected.
Nvidia’s China Dependence
China accounts for 20–25% of Nvidia’s revenue, so export limitations can dampen near-term financial performance. However, Nvidia stated the worldwide demand offers ample growth opportunities beyond China.
Morgan Stanley analyst Joseph Moore expressed surprise at the “draconian” controls but believes business will continue exceeding expectations globally. He reiterated Nvidia as their top semiconductor pick.
Export Control Update Details
The export control update retains the teraflop restriction but adds performance density limits on gigaflops per mm2 of silicon. Licensing is also required for products in a gray area below the thresholds.
This is stricter than expected, reducing the upside in Moore’s modeling. However, limiting performance density instead of licensing may prove less disruptive for most products.
Morgan Stanley’s Surprise But Reaffirmed Bullish Stance
Moore was surprised by the severity of the export control update which warranted the stock’s selloff. The broad licensing requirements create uncertainty on 20–25% of Nvidia’s demand.
However, Moore reiterated his bullish view on Nvidia as a top pick in semiconductors. He believes business will continue exceeding expectations globally despite the setback.
Moore’s estimates were already conservative anticipating these controls. The strict limitations reduce modeled upside but are not seen as overly disruptive by industry contacts.
Long-Term Growth Drivers Intact
Nvidia retains strong growth drivers in AI, data centers, autonomous vehicles, omniverse, gaming, and the metaverse. It continues dominating in AI chips and investing in new growth markets.
The secular trends toward AI, edge computing, cloud gaming and the metaverse ensure Nvidia’s long-term growth story remains intact. Nvidia is well positioned to lead in these transformative tech shifts.
Key Takeaways for Investors
- Export controls introduce uncertainty but Nvidia expects minimal near-term financial impact
- Morgan Stanley believes performance will continue exceeding expectations globally
- Nvidia remains Morgan Stanley’s top semiconductor pick despite surprise limitations
- Long-term growth drivers in AI, data centers, vehicles, gaming and the metaverse are unchanged
- Nvidia stock warrants an overweight rating with 45% upside to Morgan Stanley’s lowered $600 target
The export control update brings more severe limitations than expected, but Nvidia is confident on delivering strong growth regardless. Morgan Stanley also remains bullish on Nvidia’s ability to outperform, reiterating their top pick status.
Nvidia’s future looks bright as a leader in AI, cloud, metaverse and other transformative technologies. Patient investors should continue accumulating positions in this top semiconductor name on any weakness.
Q: How severely will export controls impact Nvidia’s business?
A: Nvidia expects minimal near-term financial impact as worldwide demand remains strong. Morgan Stanley concurs performance will continue exceeding expectations globally.
Q: Does the export control update change Nvidia’s long-term outlook?
A: No, the update does not affect Nvidia’s leadership in key growth markets like AI, data centers, autonomous vehicles, gaming, and the metaverse.
Q: Is now a good time to buy Nvidia stock?
A: Yes, Morgan Stanley believes the selloff is overdone and investors should continue accumulating Nvidia stock. The long-term growth story remains compelling.