Collateral Damage: NVIDIA shares drop after Chinese tech firms cancel orders worth $5 billion

NVIDIA Corporation experienced a significant decline in its valuation, of approximately 5 per cent, causing its stock to reach a nearly five-month low on Tuesday. This drop followed a report by The Wall Street Journal, indicating that the prominent artificial intelligence (AI) company may be compelled to terminate advanced chip orders to China valued at up to $5 billion. This action is necessary to comply with the recently imposed restrictions by the US government.

Last week, NVIDIA received notification regarding the new export restrictions from the US Commerce Department. These regulations now apply to AI chip orders that were originally slated for delivery to major Chinese technology firms in the coming year, which include Alibaba Group, ByteDance, the owner of TikTok, and Baidu. This information was disclosed by sources familiar with the situation as reported by The Wall Street Journal.

NVIDIA’s stock fell to as low as $392.30, down 4.7 per cent, to the lowest level since mid-June. The stock, which has been one of the major drivers of this year’s 22 per cent gain in the Nasdaq index, is now down nearly 20 per cent from its record high close of $493.55 reached on August 31. It was last down 2.09 per cent.

“The stock is getting oversold,” said Tom Plumb, chief executive and lead portfolio manager at Plumb Funds, which has NVIDIA as one of its largest holdings.

“Previously, NVIDIA has said this is not going to have a short-term impact but it’s more in the long term. We still expect a pretty strong quarter and think it’s a great long-term holding, although we are not adding any new positions because of the volatility,” Plumb added.

A NVIDIA spokesperson said there is “high demand” for its advanced chips, which often require significant lead time to build, and that it is working to allocate orders to its “wide range of customers” in the United States and elsewhere.

“These new export controls will not have a meaningful impact in the near term,” the NVIDIA spokesperson said in a statement.

Earlier this month, the Biden administration imposed export restrictions on shipments of more AI chips designed by NVIDIA and others to China, a move designed to stop Beijing from receiving cutting-edge US technologies to strengthen its military.

The new rules go into effect in November and include export controls to countries including Iran and Russia.

“I think NVIDIA is priced for perfection and any trip off can have a major impact when you have a stock that is trading at 20 times sales and 40 times earnings,” said Thomas Hayes, chairman at Great Hill Capital in New York.