Nvidia (NASDAQ:NVDA) shares have been declining after news broke about forthcoming legislation aimed at preventing the smuggling of advanced AI chips to China. U.S. Representative Bill Foster plans to introduce a bill in the coming weeks that would enable tracking of artificial intelligence chips after sale and block unauthorized activation.
The bill would direct U.S. regulators to develop rules in two critical areas: verification that chips remain in authorized locations according to export control licenses, and prevention of chip activation without proper export licenses. If enacted, the Department of Commerce would have six months to establish tracking regulations to ensure restricted chips don't end up in unauthorized locations. Should you still buy NVDA stock? Let’s take a look at what this new bill entails for Nvidia.
The proposed legislation would direct U.S. regulators to establish rules for monitoring the whereabouts of AI chips after they are sold. According to Foster, the technology necessary for tracking is already available, and much of it is built into NVIDIA's existing products. Independent technical experts consulted by Reuters have confirmed this assessment. The bill has garnered support from both Democrats and Republicans.
This includes Representative Raja Krishnamoorthi from the House Select Committee on China and Representative John Moolenaar, who chairs the committee.
The legislation consists of two components that would first track chips to verify they remain in authorized locations according to export control licenses. Then, it would prevent chips from activating if they lack appropriate export licenses. If passed, the bill would give the U.S. Department of Commerce six months to develop and implement these regulations.
China generated around $17 billion in revenue for NVIDIA in its last fiscal year and accounted for 13% of the company's total sales. Both the Trump and Biden administrations have progressively implemented stricter export controls on NVIDIA's products destined for China, but reports show that “smuggling” continues.
Prosecutors in Singapore have already charged three individuals (one Chinese national) with fraud in a case involving servers that may have contained smuggled NVIDIA chips. NVIDIA has previously maintained that tracking its products after they are sold is not feasible, but Foster and technical experts disagree.
China-related risks are yet to be fully priced in since investors don’t yet think Nvidia will lose a serious amount of revenue. But that is not the case. The company has already estimated that existing export bans will cause a $5.5 billion charge, whereas some analysts see over $10 billion in revenue losses.
Simultaneously, China is accelerating its semiconductor self-sufficiency efforts. Chinese firms like Huawei (with its Ascend chips), SMIC, and Biren Technology are developing domestic alternatives to NVIDIA products. Some companies are reportedly now capable of producing 5nm chips.
As a result, Nvidia will lose revenue not just from China, but from Singapore, Vietnam, and other places where chips are re-exported to China. If you combine China-derived revenue with revenue from Singapore and Taiwan, that’s 47% of Nvidia’s revenue, and 0.1% more than what it got from the US. Losing just a third of that revenue is going to be pretty bad. And not only that, if those chips are then sold to US companies, the extra supply could drive down margins by narrowing the supply-demand gap.
NVDA stock has climbed over 16% in the past month, and if you are looking to take a multi-year position, I still think the stock is cheap at these levels. But there’s a good chance you can find the stock lower in a couple of months.
