Nvidia's new chip to address U.S. export rules to China should help blunt lost sales risk

Published Tue, Nov 8 20221:41 PM ESTUpdated Tue, Nov 8 20221:45 PM EST

Shares of Nvidia (NVDA) were getting a bump higher Tuesday after the company confirmed it has developed a new chip, designed specifically to address the U.S. government's concerns about possible Chinese military applications for its A100, a powerful graphics processing unit that can be used to run artificial intelligence. We view the news as a step in the right direction toward mitigating lost sales in China. According to Reuters , the new Nvidia A800 represents the first reported effort by a U.S. semiconductor designer to create an advanced chip or China that adheres to the new U.S. export restrictions, which came to light in late August. China sales rules As a reminder , the U.S. government, about two-and-a-half months ago, ordered companies such as Nvidia and Advanced Micro Devices (AMD), both Club holdings, to halt the sale of certain chips that were deemed important to national security to China and Russia, fearing they could be reprogrammed for military use. It's worth noting that neither company sells to Russia — and AMD said then and reiterated last week in its post-earnings call that it does not expect its business to be materially impacted by the U.S. government rules concerning China. Specifically, at Nvidia, the chips restricted by the U.S. government are the A100 and the yet-to-be-released H100, according to a company filing with the Securities and Exchange Commission in late August. The filing also said the U.S. government restrictions would apply to any future chips developed by Nvidia that perform "equal or greater than thresholds that are roughly equivalent to the A100, as well as any system that includes those circuits." Lost revenue risk At the time when the new rules became known, Nvidia said it expected that as much as $400 million in sales in China were at risk in its fiscal third quarter. Though of course, future quarters could also be impacted as China has historically been a big market for the company. The company is set to report fiscal Q3 results next week. While we can't quantify just how much of the ongoing impact the restrictions will have on future sales at Nvidia, the news is a clear positive as we can, at the very least, conclude that the negative impact has lessened thanks to the A800. The company told Reuters that the "[A800] meets the U.S. government's clear test for reduced export control and cannot be programmed to exceed it." Taking a step back, we want to callout that this is the second time in recent years that Nvidia has been faced with a challenge requiring the introduction of a new chip. The last time it was a new crypto mining chip aimed at addressing a video gaming chip shortage. It turns out that crypto miners at the time were using the gaming chip and gobbling up all the supply. Essentially Nvidia reduced the ability for video gaming chips to be used in mining applications while simultaneously releasing a dedicated mining chip that could be repurposed for gaming. This reduced the impact of a secondhand market flood when crypto prices came down and mining became less profitable. Bottom line Looking ahead, while the A800 update is a clear-cut positive that should help diminish the negative impact of the export controls, we remain cautious on the sector overall. Though the A800 does speak to Nvidia's ability to quickly adapt and meet the needs of customers while working within an everchanging landscape of rules and regulations, it doesn't change the fact that we are in a full on war with China for technological dominance. As the chips inevitability become more advanced, it stands to reason that the scrutiny placed on who has access to those chips will intensify. As a result, while we are maintaining exposure to the semiconductor industry, we have significantly reduced it in recent weeks and see no rush to rebuild those positions despite this latest update. (Jim Cramer's Charitable Trust is long NVDA and AMD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Nvidia headquarters in Santa Clara, California, Feb. 23, 2021.

David Paul Morris | Bloomberg | Getty Images

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