Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Nvidia NVDA expects to incur USD 5.5 billion of write-offs associated with its H20 artificial intelligence GPU, as the US has restricted its export to China. The H20 was crafted specifically for the Chinese market to allow Nvidia to circumvent prior US restrictions. Shares fell about 6% after hours.
Why it matters: The US government has placed another round of restrictions on Nvidia as the country strives to lead the AI race. China has shrunk to about 10% of Nvidia’s revenue from 20%, and we now expect it to go to close to zero and we don’t foresee a turnaround any time soon.
The USD 5.5 billion of write-offs will relate to inventory and purchase commitments for the H20, as we assume that these less capable chips might not find a home with customers in developed markets.
The bottom line: We lower our fair value estimate for wide-moat Nvidia to USD 125 from USD 130 as we cut our revenue estimates to exclude China now and in the future. We retain our Very High Uncertainty Rating. Shares appear undervalued to us, as tariff concerns are likely weighing on the stock.
We lower our revenue estimates for the July quarter by 10% and carry forward our preexisting growth rates across a smaller revenue base. Partially offsetting these cuts is an increase in our long-term revenue estimates as we remain optimistic about AI buildouts in developed markets.Tariffs and geopolitical tensions remain a near-term and long-term concern for Nvidia and other chipmakers, while the future of AI expansion isn’t crystal clear either. These factors, among others, underpin our very high uncertainty rating. China is just one of many moving pieces.
Coming up: We expect to gain more insight into these restrictions, along with tariffs and the overall state of AI spending, during Nvidia’s earnings call in late May. In the meantime, we doubt that businesses are slowing their AI investments, which might support ongoing AI GPU sales through 2025.
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