How will the chip ban affect Nvidia's stock?

Nvidia NASDAQ: NVDA and AMD have been directed by the U.S. government to stop the sales of their latest data center and enterprise chips, specifically the A100 and H100 chips. These chips have a number of different uses including AI, enterprise, networking, and cloud. Nvidia’s stock fell in after-hours trading, as the news came through, with the stock retreating by almost 7%. Nvidia has more to lose as the ban may result in $400 million in losses according to Tom’s Hardware.

Nvidia provided the following statement:

“On August 26, 2022, the U.S. government, or USG, informed NVIDIA Corporation, or the Company, that the USG has imposed a new license requirement, effective immediately, for any future export to China (including Hong Kong) and Russia of the Company’s A100 and forthcoming H100 integrated circuits. DGX or any other systems which incorporate A100 or H100 integrated circuits and the A100X are also covered by the new license requirement. The license requirement also includes any future NVIDIA integrated circuit achieving both peak performance and chip-to-chip I/O performance equal to or greater than thresholds that are roughly equivalent to the A100, as well as any system that includes those circuits. A license is required to export technology to support or develop covered products. The USG indicated that the new license requirement will address the risk that the covered products may be used in, or diverted to, a ‘military end use’ or ‘military end user’ in China and Russia. The Company does not sell products to customers in Russia."

Nvidia’s A100 and H100 chips are primarily targeted at enterprise systems, these clients range from Microsoft to Amazon, etc. Nvidia has been struggling with clients as it has faced a number of issues stemming from a fall in crypto demand, and a general lull in the gaming market. Macroeconomic headwinds and cyclicality of the semiconductor market continue to affect Nvidia’s sales.

Investors' initial reactions show the market is already highly uncertain, and valuations that were much higher in the not-so-recent past have pared back. A number of semiconductor players specifically Micron have warned that valuations and market exuberance are not sustainable, and in previous cycles when the semiconductors went into a cyclical downturn, semiconductor stocks declined significantly more than they have recently.

Financial conditions have also started to show weakness, with cash during the most recent quarter coming in lower than the previous year. Cash per share continues to be around $6.8, which would indicate the stock trades at 21x cash, similar companies such as AMD Nasdaq: AMD, trade at a slightly higher valuation, with cash per share at 22x.

The financial impact is likely to be anywhere from $400-$500 million on revenue, and Nvidia has guided that yearly revenue will come in anywhere from $2-3 billion lower. The lower guidance from management will also affect margins, primarily as pricing pressure takes a toll on profits. Net profit margins currently average around 33%-34% but could slip by 500 bps over the next year. That current trend is likely to result in a net profit of $1.8 billion for the quarter and could send the second stock further lower.

Financial conditions do not suit outperformance over the medium term, and Nvidia’s stock may reach new 52-week lows as a result. Investors will continue to wait and watch, but early signs show that unless we see a significant recovery in demand, a new normal may have been established. The current RSI for the stock stands at 31, indicating that the stock might be slightly oversold. The stock is currently down 60% from its 52-week high. The open interest stands at 1.54, and investors are increasingly bearish on the stock's future. But implied volatility has been slowly trending downwards hitting .54 down from a recent high of .816

NVidia had already been under pressure before the news came out and now with a ban on chips Nvidia’s stock may remain under pressure for a while as the backdrop of interest rates, and economic headwinds continue to weigh on the stock.