Can Nvidia Navigate the New U.S. Chip Restrictions on China?

Since posting a record high in August, shares of Nvidia (NVDA) have languished due to mounting headwinds for the company.  The steady increase in global interest rates has undercut most high-valued chip stocks, as the 10-year T-note yield posted a new 16-year high on Thursday. Also, new U.S. rules restricting cutting-edge technology to China threaten Nvidia, as 20% of the company’s revenue came from China last quarter.

The latest development to weigh on shares of Nvidia was Tuesday’s announcement by the Biden administration to keep advanced semiconductor chips out of China, including restricting Nvidia’s sale of processors explicitly designed for the Chinese market.  The latest regulations aim to prevent China from accessing technology that could have military applications.  Bloomberg Intelligence said, “Though the restrictions won’t greatly affect short-term estimates, they can erode Nvidia’s long-term prospects.”

Shares of Nvidia have been on a tear this year, up by more than +188%, and it is the top-performing stock in the S&P 500 ($SPX) (SPY) and Nasdaq 100 ($IUXX) (QQQ) indexes.  The stock has soared this year as the company has repeatedly seen its sales and revenue surge above expectations and solidified Nvidia as a main beneficiary of the artificial intelligence (AI) craze.  However, shares of Nvidia fell -12% in September, its worst monthly performance in more than a year, weighed down by concerns about demand sustainability.

Despite the recent setback in Nvidia’s share price, most analysts covering the company remain bullish on the stock.  According to Bloomberg data, 95% of analysts have a buy-equivalent rating on Nvidia. However, some cracks are beginning to show in Nvidia’s outlook as some analysts have cut their price targets on the stock.  Citigroup cut its price target on Nvidia to $575 from $630, Morgan Stanley cut its price target to $600 from $635, and KeyBanc Capital Markets cut its price target to $650 from $750.

Overall, the outlook for Nvidia remains favorable despite these recent headwinds.  Morgan Stanley has Nvidia as its top pick in the semiconductor sector and said the U.S. chip export restrictions to China “is a significant setback, but business is likely to continue to exceed expectations despite that.”  Also, Silvant Capital Management believes the added export restrictions for China hardly dent Nvidia’s long-term appeal, saying, “You’re going to see some volatility in the stock that’s not pleasant to go through, but it’s also not unexpected. We like Nvidia in our portfolio and see value when it pulls back.” 

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.