Nvidia (NASDAQ:NVDA) stock is down almost 60% from its all-time highs, and much of the negative news has already leaked. So is the stock a decent investment at the moment? This essay argues that the stock has the potential to fall another 60% or more in the future year. Beyond The Hype’s Nvidia thesis update comes in response to recent difficulties in the Company’s second-largest market, China.
Last week, the US government imposed new limitations on what compute accelerators may and cannot be exported without a license, sending shockwaves through the markets. According to Nvidia, which released an 8-K on the topic last Wednesday evening:
“On August 26, 2022, the United States 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; the new license requirement also applies to DGX or any other systems that incorporate A100 or H100 integrated circuits and the A100X.”
Any future NVIDIA integrated circuit that achieves peak performance and chip-to-chip I/O performance equal to or more than levels roughly similar to the A100, as well as any system that contains those circuits, is likewise subject to the licensing obligation. In addition, a license is necessary to export technology to support or develop covered items. According to the US Government, the new licensing requirement will address the danger that the covered items may be utilized in, or diverted to, a military end use’ or military end user’ in China or Russia. The Company does not serve customers in Russia.
The additional licensing requirement may impact the Company’s ability to finish H100 development on schedule or serve current A100 clients. In addition, it may force the Company to relocate some activities out of China. The Company is working with the USG to get exemptions for its internal development and support operations.
Why Should Nvidia’s China Business Suffer Long-Term?
Chinese clients are unlikely to be hampered by US government limits on what gear they can and cannot use. In addition, the Chinese government is anticipated to forcefully urge Chinese enterprises to seek local alternatives.
When we look at the competition, we can observe various emerging Chinese attempts at ML silicon solutions. Biren may be the most promising and intriguing of this group. Biren announced their competitive BR100 GPGPU solution at the recent Hot Chips conference. This chip has received positive feedback from users all around the internet.
According to the linked Next Platform evaluation, the BR100 promises performance superior to the A100. Because A100 is the US government’s cutoff point, this approach may appeal to Chinese buyers. Of course, the software for the BR100 will not be up to Nvidia standards. Still, software work is something China must do to overcome the constraints imposed by the US government. Assuming Biren can meet its claims on time, Chinese clients have a tremendous incentive to use it.
Do Not Underestimate the Risk of Losing Market Share to Local GPUs.
Many investors may be wary of Chinese firms’ capacity to provide and spread competitive acceleration solutions. They should not, though.
The market has overvalued Nvidia’s moat in the GPGPU and accelerator industry, contrary to the expectations of many investors and experts. Beyond The Hype has long warned readers that the machine learning hardware market will be significantly fragmented, with CSP verticals and other merchant silicon alternative providers like AMD and Intel gaining market share (INTC).
As a point of perspective, Nvidia had no competition until Google (GOOG) (GOOGL) introduced its TPU, and Nvidia used to hold around 99% of the data center accelerator market until about five years ago. However, as seen by current data (see graphic below), Google’s and other solutions have gradually reduced Nvidia’s share, which now stands at around 82%.
Nvidia’s market loss in the US has been gradual. Still, it might be considerably faster in China owing to the trade war and China’s ambition to be independent of US technology.
The idea here is not that Nvidia will not be a major participant in the ML field but that Nvidia’s eventual share of the ML industry will be considerably lower than many investors predict due to competitive and geopolitical factors.
Potential Economics Impact
Suppose Biren or another company can deliver comparable goods in 2022 or 2023. In that case, Nvidia’s Datacenter business might end in 2023 with a quarterly revenue loss of $400M to $800M. Given that Nvidia’s Gaming business is collapsing due to the crypto bubble and that the Datacenter business has been pretty flat for the last couple of quarters, one has to ask what a plausible exit run rate for Nvidia in CY2023 is!
If China Inc. delivers, a $6B to $7B quarterly revenue run rate by the end of CY2023 is feasible. This forecast compares extremely badly to current sales expectations of around $9 billion in Q4 FY2024. Because Nvidia paid for significant (but unknown) fab and packaging capacity at the height of the COVID and crypto booms, the economic impact of such a revenue shortfall on Nvidia might be disproportional. Nvidia will almost certainly have to take another write-down on this point in the coming quarters.
Lower revenues, particularly from the lucrative Datacenter category, implying that Nvidia’s margins may suffer. Reduced revenues, lower margins, and write-offs suggest that Nvidia’s EPS might significantly blow in the fiscal year 2023.
Nvidia remains outrageously overpriced based on the illusion of 100% ML silicon supremacy, which is unlikely to occur. Investors expecting hypergrowth may be disappointed in CY2023. Beyond The Hype believes that the analyst community’s FY2024 EPS projection of $6.26 is way too high and that Nvidia may deliver approximately half of that EPS from crypto, COVID, and data center hits. What are the worth of a company with dropping revenues, a projected EPS of $3 per share next year, and negative growth? Not $135!
What is the current market value of Nvidia? Beyond The Hype forecasts it to be under $50, a significant decrease from current values.
Featured Image – Megapixl © Rafaelhenriquepress