Last Thursday, Nvidia (NASDAQ: NVDA) witnessed a staggering 16.4% surge in its stock following yet another phenomenal quarterly report. The company’s growth in the fourth quarter of fiscal 2024 was nothing short of spectacular, attributed to the unwavering demand for its data center platform’s chips and related products across various industries and regions, driving the capabilities of artificial intelligence (AI).
In the fiscal Q4, Nvidia reported an astounding 265% year-over-year revenue increase to $22.1 billion, surpassing Wall Street’s expectations of 241% growth. Adjusted earnings per share (EPS) skyrocketed by an impressive 486% to $5.16, exceeding the analyst consensus estimate of 426% growth. Furthermore, the company’s management provided guidance indicating a continued triple-digit-percentage growth trend, with anticipated spikes of 234% in revenue and 396% in adjusted EPS for Q1 fiscal 2025.
Earnings reports often unveil only a portion of the profound narrative. In discussions during the Q4 earnings call, Nvidia’s management unveiled a critical aspect that investors should take note of – the company’s data center platform’s sales strategy for China.
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Nvidia Revolutionizes Data Center Products for China
In October 2023, the U.S. government rolled out new and expanded regulations governing the export of AI-enabling products to China and select countries based on specific performance thresholds.
According to CFO Colette Kress:
The growth in our data center platform saw robust momentum across all regions except China, where our data center revenue witnessed a significant decline post the U.S. government export control regulations introduced in October. Despite lacking U.S. government licensing for shipping restricted products to China, we initiated the distribution of alternatives tailored for the Chinese market, eliminating the need for licenses. In the Q4 fiscal period, China represented a mid-single-digit percentage of our data center revenue, with similar projections for the forthcoming quarter.
Kress disclosed that historically, China contributed approximately 20% to 25% of Nvidia’s data center revenue. This reduction to a mid-single-digit percentage suggests a drop to an estimated 4% to 6%. To put this into perspective, in fiscal Q4, Nvidia’s data center revenue constituted a significant 83% of its total revenue ($18.4 billion of $22.1 billion).
Although Nvidia likely didn’t lose any data center sales in the immediate term due to existing supply constraints, it merely redirected products meant for the Chinese market to other regions, balancing the impact of U.S. government regulations. Nonetheless, there exists a potential risk of revenue loss should these export restrictions persist or become more stringent in the future.
Potential Financial Upside for Nvidia from Alternative China Products
There are two primary implications to note regarding this development. Initially, Nvidia’s exceptional growth in its data center platform does not hinge on the China market in the short or intermediate term. Numerous entities within the U.S. and globally exhibit eagerness to acquire Nvidia’s AI-enabling products.
Secondly, given China’s historically strong demand for Nvidia’s data center products, the company’s financial performance stands to benefit significantly if the newly crafted Chinese-specific products achieve moderate to considerable success.
Currently, these alternative data center products designed for the Chinese market are in the limited “sampling” phase, as per CEO Jensen Huang. This explains why Nvidia foresees Q1 fiscal 2025 data center sales to China remaining within the single-digit percentage bracket. Looking ahead, Huang expressed the company’s resolve to strive for success within the constraints posed by the Chinese marketplace.
While China might not regain its position accounting for 20% to 25% of Nvidia’s data center sales, the company’s dominance in the data center AI sector indicates a likelihood of attaining some level of success in selling its new alternative products in the Chinese market.