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China Concerns Persist Despite Nvidia's Outlook Exceeding Expectations

China Concerns Persist Despite Nvidia's Outlook Exceeding Expectations
Due to new regulations in the United States, chip maker Nvidia said it anticipates a sharp decline in fourth-quarter sales in China, a major source of revenue. However, it projects overall revenue to surpass Wall Street projections as supply-chain problems improve.
The AI business is dominated by graphics processing units (GPUs) from Nvidia, and the company is expected to suffer from the greatly increased export restrictions imposed by the United States on goods shipped to China. In the previous three quarters, around 25% of Nvidia's datacenter sales came from sales of the impacted processors.
"Export controls will have a negative effect on our China business, and we do not have good visibility into the magnitude of that impact even over the long term," Chief Financial Officer Colette Kress said during a conference call with analysts.
Additionally, Kress verified rumours that the industry leader in chips is creating freshly compliant chips for China, although these won't significantly boost revenue in the fourth quarter.
The stock of Nvidia, which has increased by more than 240% this year, fell 1.5% in tumultuous trade after hours.
Israel, where Nvidia's networking division is based and where its military is enmeshed in a battle in Gaza, presents additional threats to the corporation. Sales of that unit, whose equipment powers AI supercomputers, increased by 155% over the previous year. According to Kress, the networking industry has an annualised run rate of more than $10 billion.
According to the chipmaker, a sizable number of its Israeli staff members have been called up for active military duty, and their absence could negatively impact the company's ability to conduct business in the future.
Based on LSEG data, Nvidia predicted adjusted gross margins of 75.5% for the fourth quarter, which was higher than analyst projections of 72.64%. However, the company's issues in China might make it difficult to sustain those profits.
"The company suggested the hit to sales from restrictions would be offset by other regions; however, there were scant details on this. It also begs the question, with margins so extraordinarily high currently, will these offsetting markets support such high margins?" analyst Kyle Rodda said.
Nevertheless, Nvidia stated that as long as it pays in advance to guarantee factory priority, it expects supply for its AI processors to improve. Manufacturing is contracted out to companies such as TSMC.
The market for AI servers is expanding quickly. Since they enable products like OpenAI's ChatGPT, shipments are expected to increase by roughly 40% this year, according to research firm TrendForce.
Nvidia predicted $20 billion in revenue for the current quarter, give or take 2%. LSEG polled analysts, and they predicted $17.86 billion in sales.
Ahead of the average forecast of $16.18 billion, adjusted third-quarter revenue increased to $18.12 billion. While gaming revenue increased 15% to $2.86 billion, data centre revenue increased 41% to $14.51 billion.
The company earned $4.02 per share after deducting items, which topped projections of $3.37 per share.
Nvidia has already developed three new products for the Chinese market in reaction to the most recent set of export regulations from the United States.
According to Insider Intelligence analyst Jacob Bourne, those China-focused chips could deplete Nvidia's development resources and result in a ban, similar to what happened with its initial batch of chips for the Chinese market.
"Nvidia's move to develop specialized chips for the Chinese market, while a strategic response to export restrictions, faces challenges," Bourne said.
In October, American officials announced a fresh set of limitations, stating that they will keep revising them as circumstances warrant.
Additionally, the business unveiled the H200, a new AI chip that will outperform Nvidia's top-tier H100 processor, last week.
One of the most expensive components of the chip, the H200 has more high-bandwidth memory, which controls how much data it can process rapidly.
Rival Advanced Micro Devices had previously made a big deal out of one of its rival AI chips' large amounts of high-bandwidth memory.
Not only do major internet corporations like Alphabet's Google,, and most recently Microsoft buy Nvidia hardware for their own data centres, but they have also disclosed AI chips made by in-house design teams.
Although creating custom chips can take years and cost hundreds of millions of dollars, it allows the big cloud businesses to add capabilities that are uniquely tailored to their AI requirements.
Earlier this month, Microsoft introduced two specially crafted processing chips, one of which is capable of running massive language models.
Since access to Nvidia chips is restricted by US pressure, local businesses are also becoming interested in the AI chip developed by the Chinese tech company Huawei.

Christopher J. Mitchell

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