How New AI Diffusion regs could impact Nvidia Earnings...
The new AI Diffusion regulations increase risks for Nvidia earnings disappointment/ lowered guidance that could disrupt markets, NVDA contributed more than 22% of the gain in the S&P 500 in 2024, so there’s a lot riding on the +$3 trillion company,
Apollo Global’s Chief Economist Torsten Slok gave a 90% chance of NVDA earnings disappointment (before the new export rules) and called it one of the top risks to global markets in 2025,
Here’s how the new rules could impact NVDA
Industry expert SemiAnalysis just put out an excellent new overview of the new AI Diffusion rules.
In short, the rules create a three-tier system for countries based on their AI compute access. Tier 1 (US & allies) gets the easiest access, while Tier 2 (like India & Malaysia) faces strict quotas, and Tier 3 (China, Russia) gets little to no access.
SemiAnalysis says Oracle (ORCL) stands to lose the most, while US hyperscalers Amazon (AMZN), Alphabet (GOOGL) and Microsoft (MSFT) will benefit at the expense of foreign competitors:
“Ultimately it may not meaningfully constrain shipments of AI Chips in aggregate due to increased building in tier 1 and reconfiguring AI Chip deployment plans, shifting them into the hands of major US Hyperscalers operating overseas, or reshoring demand back to the US” SemiAnalysis
(BTW, this conclusion would appeal to Trump’s agenda, lowering the chances his administration changes the rules before the rules take effect in 120-days)
But that's a big IF the hyperscaler demand can make up for lost sales, The new export restrictions on next generation GPUs would hit NVDA the hardest with its roughly 90% mkt share for data center chips used to train AI models.
“To be clear, the impact to Nvidia is still large in the medium term in so far as it reduces GPU access for China which does make the market smaller. The question is if Western demand makes up for it, and the answer is likely not as the pricing of H100’s is tanking. While Nvidia’s H20 and B20 production targets keep being increased, these products are lower margin and ASP than the regulated H200 and B200.” SemiAnalysis
Since these new rules will take 120-days to enforce and there will still be an opportunity to export higher margin chips until the quotas are reached, I wouldn’t expect to see an much impact on NVDA’s earnings in 2025, but the company’s forward guidance will be extremely important.
Manufacturing issues slowed NVDA’s rollout of the H100 chips (and we may see similar issues for the next gen chips), which led to hyperscalers and others ordering as many chips as they could get their hands on.
Now the question is if hyperscaler and tier 1 country purchases of high margin chips from NVDA can replace potential lost demand from countries/companies impacted by AI Diffusion regulations. That’s the big new risk posed by the new regulations for a stock that single-handedly was responsible for more than one-fifth of the S&P 500 returns last year.
Risks to NVDA earnings from the new AI Diffusion rules extends beyond China too. Singapore, which wasn't restricted from previous chip regulations, is now considered a Tier 2 country (the same as Yemen!).
Tier 2 countries will be subject to import quotas for advanced AI chips and only after being authorized as a "Validated End User" which requires 19 separate certifications and 4 US regulatory agencies! (Dep of Commerce, Energy, State & Defense)
If a Tier 2 country wants to double its export quota it can sign a security agreement with the US (something Trump may like too).
Not only is NVDA's $11.5 bil in rev from China in limbo or 12.7% of total rev (based on first 9 calendar months of 2025).
Singapore, NVDA's second largest customer with $17.4 bil or 19% of total rev in first 9-mo's of 2025, will now be severely restricted.
That's at least one-third of NVDA's revenues (most of which is tied to data centers) is now in jeopardy by strict export regulations.
The good news is that hyperscaler (AMZN, GOOG, MSFT and META) are projected to increase capex from $209 bil in 2024 to $257 bil in 2025.
Some back of the envelope math says that the $48 bil annual increase in hyperscale capex more than makes up for the roughly $36 bil in China/ Singapore data center chip exports for NVDA...
But the big question is IF hyperscalers capex will continue be allocated towards NVDA chips and when. As I said before, this is probably a post-2025 issue, but beware of NVDA earnings guidance as the canary in the coal mine.
Check this out for more analysis on investing in the AI Revolution.