Investors eagerly anticipated Nvidia’s (NASDAQ: NVDA) latest earnings report, wondering if the AI chip giant could uphold its remarkable triple-digit revenue growth trend. To their relief, Nvidia’s fiscal 2024 fourth-quarter results surpassed expectations, setting new records for revenue and net income, both seeing triple-digit increases for the quarter and the year.
Nvidia’s unrivaled dominance in the AI chip market, commanding an 80% share, has been the driving force behind its substantial success. As a result, the company’s stock has surged by more than 270% in the past year.
However, a noteworthy caveat marred Nvidia’s otherwise stellar performance—the decline in the company’s data center revenue in China, a market that had accounted for 20% to 25% of its data center revenue in recent quarters. Should investors be concerned about this dip?
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The Impact of U.S. Ban on Chip Exports to China
The decline in Nvidia’s data center revenue in China can be attributed to a U.S. ban imposed late last year on the export of high-performance chips to China and other countries deemed security threats. The U.S. justified this move by citing the potential use of these chips by China to develop “advanced military systems”, including weapons of mass destruction.
To comply with the ban, Nvidia ceased exporting its top-performing chips to China, resulting in a “significant” drop in data center sales to the country in the fourth quarter. China’s share of data center revenue was reduced to a mid-single-digit percentage. Nvidia anticipates this percentage to remain relatively constant in the ongoing quarter as well.
In response to this situation, Nvidia is introducing alternative chips—products that do not require a special license from the U.S.—into the Chinese market. The company is currently testing these new offerings in the market and striving to compete within the constraints of U.S. legislation.
There is a looming risk for Nvidia that local competitors could develop chips superior to what the company is permitted to export to China, potentially undermining its sales in the region. Chinese customers may refuse the slower chips altogether, or they may temporarily accept them until they gain access to more powerful domestic chips.
Nvidia’s CEO Jensen Huang expressed during the recent earnings call that the company aims to compete vigorously for its business after the conclusion of the new quarter, implying a determined effort to navigate this challenge.
Record-Breaking Data Center Revenue
Returning to the pivotal question: Should investors be fretful about the persisting drop in China’s revenue negatively impacting Nvidia’s growth prospects? Well, not necessarily.
Firstly, data center revenue surged across all other geographical regions, marking triple-digit gains year over year and reaching a historic high of $18.4 billion. Even with considerably lower revenue in China, Nvidia’s overall data center revenue continues to soar. In a worst-case scenario where local chipmakers seize a significant market share, other regions possess the potential to power substantial growth for Nvidia.
Secondly, as Nvidia is just commencing its journey with alternative products in China, the company has ample room for stronger revenue in the future as it engages with customers and adapts to the new environment. And if revenue does not surge, as mentioned, it may not spell catastrophe for this high-growth AI player.
What does this mean for investors? It is vital to monitor developments in China. Despite the decline, it remains a critical market, and Nvidia has the opportunity to elevate its growth by winning over customers with its new offerings. However, if Chinese revenue continues to stagnate, this does not portend disaster for the company.
Nvidia continues to be an attractive investment thanks to its recent quarterly earnings gains and its prospects in the flourishing realm of AI.
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Adria Cimino holds no position in any of the stocks mentioned. The Motley Fool maintains positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
