Does China Investigation Change NVIDIA's Outlook; Yes, No, Maybe?

Key Points

• China announced a probe of NVIDIA's 2019 acquisition of Mellanox.
• The move is a likely response to United States semiconductor sanctions and will have little direct impact on NVIDIA.
• Analysts are unfazed by the news and see this stock advancing to new highs. 

NVIDIA's NASDAQ: NVDA stock price dived after reports that China is investigating it for violations of its anti-monopoly laws. The move could impact NVIDIA’s business; China accounts for about 15% of the annual revenue, but how far is China willing to go? NVIDIA’s chips and CUDA framework are essential to harnessing AI power today; China’s investigation is more likely a warning than a real threat. 

NVIDIA has competitors, and Advanced Micro Devices NASDAQ: AMD is one, but it is still in catch-up mode, leaving China with few options other than slapping NVIDIA on the wrist and letting it go about its business. As for who the warning is for, it’s questionable whether it was for NVIDIA, the United States Government, or both. The probe could be China’s retaliation for U.S. semiconductor sanctions, heightening tensions in the global semiconductor war. 

NVIDIA Under Investigation for Monopolistic Practices in China and the United States

The potential violation relates to the acquisition of Mellanox in 2019/2020. Mellanox was a networking company focused on enterprise. Its fabless operations included a variety of adapters, switches, cables, and other silicon products for high-performance computing, data centers, cloud, and data storage.

NVIDIA announced plans to acquire the company in 2019 and closed the deal in 2020 for a valuation of $6.9 billion. Today, Mellanox is part of NVIDIA’s networking business, which includes high-speed ethernet and Infiniband solutions. China is upset because NVIDIA didn’t disclose Mellanox product information within a 90-day window intended to prevent a monopoly. 

Meanwhile, the U.S. Justice Department is investigating whether NVIDIA has made it difficult for consumers to get rival products. The answer to NVIDIA actively working against its rivals is yet to be discerned. Still, it will likely center on the fact that its products set the stage for a technological revolution that CUDA unlocks. 

Is it hard for NVIDIA semiconductor rivals to compete? Yes, it is. They are years behind the curve in developing similar technology and support infrastructure and demand for these products is enormous. The question is whether NVIDIA has market share to lose, and the answer is yes.

Most AI developers don’t care if the data center has an NVIDIA, Advanced Micro Devices, or other label so long as it can handle the workload, train the models, and power the apps. 

What do the analysts think about China’s probe? Not much, at least not enough for any revisions to appear soon after the release. The news surely raises some questions, but the takeaway is that the revenue and earnings growth outlook is unchanged. As it is, the consensus reported by MarketBeat forecasts another 50% growth in 2025, sufficient to put revenue growth near 6500% since 2020 when the AI boom was getting started. Based on the trends, the forecast is likely low, and NVIDIA will outperform. 

Institutional and Fund Money Flows Into NVIDIA

The institutional activity shows market support for NVIDIA remains high. The balance of activity has been bullish all year and is unlikely to change until there is a clear sign business has topped. Until then, institutional activity is a tailwind for the market that will likely support it on dips like the one created by the Mellanox probe news.

The market for NVIDIA stock is down more than 2.0% but still well above critical support targets and showing support intraday. The likely scenario is that NVIDIA stock continues to move sideways within its range, with a chance of setting a new high by the end of the year or early 2025. The analysts' consensus price target implies a 15% upside from the 150-day EMA in early December; the revision trend leads to the high-end range of targets or another 15% upside.