Nvidia Shares Dip After Reporting In-Line Q3 Earnings Amid US-China Trade War and Export Control Concerns

In a somewhat unexpected turn of events, Nvidia, the tech powerhouse, reported revenue for Q3 2021 that largely met expectations, leading to a minor dip in share prices by up to 3.5% in after-hours trading post the report release.

This latest financial update offers a glimpse into how Nvidia’s business operations have been impacted by the ongoing trade tensions between the US and China. In May, the company had cautioned about a potential $8 billion decline in revenue due to export controls on shipments to China.

For the quarter, Nvidia generated $46.7 billion in revenue, representing a 56% increase year-over-year and slightly surpassing the predicted $46 billion by analysts. Net income reached an impressive $26.4 billion, up 59% compared to last year, exceeding the anticipated $24.7 billion.

Despite these robust figures, they represent a deceleration from the 122% year-over-year revenue growth and 168% year-over-year profit growth reported in the same period last year. Thomas Monteiro, senior analyst at Investing.com, commented that “the stock was priced for perfection” and needed a significant beat to satisfy investors following the results.

As a bellwether for the larger AI ecosystem, Nvidia’s slowdown may stir concerns about potential corrections in the market. Recent warnings of an ‘AI bubble’ have been issued by OpenAI CEO Sam Altman, and MIT researchers suggest that most companies are yet to generate substantial profits from AI implementations.

Despite these apprehensions, optimism among investors had been high leading up to this report. Nvidia CEO Jensen Huang enjoys a close relationship with President Trump, and there have been recent shifts in the administration’s stance on advanced chip sales to China. Additionally, reports suggest that Nvidia is developing a new China-specific chip.

Dan Ives, analyst at Wedbush Securities, noted that “Nvidia earnings could be another positive catalyst for tech stocks” ahead of the report. Nvidia’s shares have seen a significant growth of over 30% since the start of the year and reached a record high valuation of $4 trillion in July.

Earlier this year, sales of Nvidia’s H20 AI chip to China were halted due to trade restrictions. This move significantly impacted the company’s business with China, which accounted for approximately 13% of its sales last year. In Q1, the company revealed that these restrictions led to around $7 billion in charges from unfulfilled sales and lost revenue.

However, Nvidia reported no sales of H20 chips to customers in China during the Q3. The company also benefited from a $180 million release of previously reserved H20 inventory, derived from approximately $650 million in unrestricted H20 sales to a customer outside of China.

Following regulatory approval, Nvidia resumed sales of the H20 chip earlier this year. The company, along with fellow chipmaker AMD, recently agreed to pay 15% of their chip sales to China to the US government in exchange for an export license, a move unprecedented in the industry.

The agreement is expected to reestablish Nvidia’s access to the Chinese market. However, questions have been raised about Beijing’s willingness to allow these chips due to security concerns. Nvidia has consistently denied any claims of backdoors or spyware in its products.

Rumors suggest that Nvidia is working on a new, more powerful AI chip for China, believed to be named the B30, designed to meet both Chinese and US export regulations. The company declined to comment on these reports when approached by CNN. Investors will likely seek insights about the progress of this project during Nvidia’s earnings call.

Paul Meeks, managing director of investment banking firm Freedom Capital Markets, stated that “Nvidia’s shares could be muddied in the short term due to Trump’s on-again, off-again export controls.” However, he also expressed optimism about the company’s future performance and predicted a modest beat of analyst estimates and an optimistic long-term outlook for Wednesday’s earnings call.