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The Street
The Street
Martin Baccardax

Nvidia lower restricted AI China sales cloud blowout Q3 earnings

Nvidia (NVDA) -) shares moved lower in early Wednesday trading after the AI chipmaker blasted Street earnings forecasts but cautioned that new U.S. restrictions on tech exports would lead to a "significant" hit to its overall sales in China. 

Nvidia CFO Colette Kress noted that China sales, which comprise around 20% to 25% of total group revenues, would likely slow over the current quarter as a result of new export restrictions put in place by the U.S. government last month, aimed at limiting Beijing's access to AI and other high-tech gear. 

She noted, however, that the decline would be largely offset by gains in other regions where demand for the chips that power AI-related technologies remains firm.

The warning did, however, offset the impact of another impressive quarterly earnings report, which showed Nvidia posting an adjusted bottom line for the three months ending in October came of $4.02 per share, up more than threefold from the same period last year and well ahead of the Wall Street consensus forecast of $3.37 per share.

Group revenues, Nvidia said, soared 205% from last year to $18.12 billion, a figure that also smashed analysts' estimates of an $16.2 billion tally, with data center revenues 41% from the prior quarter to a record $14.5 billion. Overall profit margins were pegged at 74%, topping estimates of around 72.5%.

Related: Nvidia earnings in focus as AI hype translates to profit surge, record stock price

Looking into the current quarter, Nvidia sees revenue of around $20 billion, plus or minus 2%, a tally that was firmly ahead of the Wall Street consensus of around $17.2 billion, with gross margins in the region of 74.5% and 75.5%. 

Still, Kress's China warning looks hold down gains for the market's hottest tech stock heading into the start of Wednesday trading.

"We had seen historically over the last several quarters that China and some of the other impacted destinations to be about 20% to 25% of our data center revenue," Kress told investors on a conference call late Tuesday. "We are expecting in our guidance for that to decrease substantially as we move into Q4. The 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."

"We are, though, working to expand our data center product portfolio to possibly offer new regulation compliance solutions that do not require a license," she added. "These products, they may become available in the next coming months. However, we don't expect their contribution to be material or meaningful as a percentage of the revenue in Q4."

Nvidia shares were marked 2% lower in early Wednesday trading to change hands at $489.71 each, just shy of the record high of $505.48 it reached earlier this week and a move that would peg the stock's year-to-date gain to around 242%.

The group's China revenue hit may be cushioned by the release earlier this month of Nvidia's new H200 chip, which it says will be faster and offer more memory to power both generative AI and large-language models than its H100 predecessor.

The new chips, which are expected to ship in early 2024, will also make it easier for clients to run AI applications on Google Cloud using Nvidia-made chips with deeper integration between hardware and software offerings.

Nvidia in late August unveiled a partnership with Google (GOOGL) -) that seeks to leverage its cloud offering to clients, using Nvidia chips and its DGX supercomputing platform, to essentially create a new market for AI-as-a-service to thousands of companies worldwide.

The group is also expanding its reach into the PC market, where rival Intel (INTC) -) holds the lead position. Reports suggest it will use technology from Arm Holdings to design central processing units that will run the Microsoft MSFT operating system.

Nvidia was one of Arm's biggest financial supporters heading into the September IPO and tried to buy the group before being thwarted by regulators in the U.K. last year.

“80% of AI Chip consumption is coming from large hyperscalers along this current AI data center buildout, Nvidia's higher guide to a $20 billion next quarter shows the continuing data center demand into the next year for H100s as the AI sector grows," said Lucas Keh, Semiconductors Analyst at global research firm Third Bridge. Our experts expect cloud players to consume 500,000 to 600,000 H100s in 2024.”

“And despite challenges and restrictions in the Chinese market, continued sales growth can be attributed to their ability to continue to sell with new AI chip lineup: H20 L20 and L2,” he added.

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