Nvidia's biggest risk to its outlook right now is China

By Therese Poletti

Wall Street mostly got what it was hoping for with Nvidia Corp.'s fiscal fourth-quarter forecast and its optimism about the coming year, but questions about future sales to China still loom, and pose the chip maker's biggest uncertainty.

On Tuesday, Nvidia set another record for earnings and revenue in the third quarter, where revenue of $18.1 billion surpassed estimates of $16.2 billion, fueled in large part by strong sales in its data-center business for AI uses. Nvidia (NVDA) forecast another record of $20 billion in revenue for the fourth quarter, but its shares fell 1.7% in after-hours trading.

Also read: Nvidia just ended an earnings recession.

Wall Street has become nervous about the sustainability of Nvidia's stunning growth rate, so when one analyst asked Chief Executive Jensen Huang if its data-center business can continue to grow into fiscal 2025, his response that he "absolutely believe[s] that data center can grow through 2025" was a big positive for investors.

But uncertainty is the bane of Wall Street, and the one negative of the company's outlook was the question of how new U.S. export restrictions will impact its revenue in China. The export restrictions, recently set by the Biden administration, dictate what kinds of semiconductors can be sold to China for AI uses. Nvidia Chief Financial Officer Colette Kress said that the fiscal fourth quarter will see a significant decline in sales to China and other regions, including Vietnam and certain countries in the Middle East.

Sales to China and the other affected regions made up 20%-25% of Nvidia's data-center revenue over the past few quarters.

"We will work through the China issues," Kress told MarketWatch in a phone interview. "Things are different, with the U.S. government export controls, and what they would like to see. We need to follow that extremely strictly, that is something we will work through to help our customers. But in the meantime there are a lot of different opportunities with all the remaining regions that will offset what we are seeing from China."

It is too early, though, to say if demand from other regions will offset all of the impact. "We are taking each quarter at a time," she said.

Last month, several analysts cut price targets or estimates on Nvidia because of the new export controls. KeyBanc Capital analyst John Vinh lowered his fiscal 2025 estimates for Nvidia to revenue of $96.8 billion, from $116 billion, and said he viewed the new restrictions as a negative, because it will be "ultimately difficult to backfill demand." The consensus on Wall Street for Nvidia's fiscal 2025, ending in January 2025, is for revenue of $82.3 billion, according to FactSet.

Nvidia is working on new products that it can sell in those markets, but that will take time too, as the U.S. has to approve what Nvidia can sell. Bernstein Research analyst Stacy Rasgon wrote in a note earlier this month that from what he can deduce from Nvidia's new products in the works, they would "bump up just to the edge of the control thresholds but not cross them." He also noted that while local Chinese products may be competitive with Nvidia's new products, he was still encouraged.

Still, the China question has thrown a wet blanket on the unstoppable Nvidia story, at a time when some investors are also wondering how long its amazing growth story can last. The big question about whether continued strong data-center demand can offset the China impact will hopefully become clearer next quarter.

-Therese Poletti

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11-21-23 2047ET

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