How Nvidia Gets Impacted By The AI Chips Ban
The numbers behind the Biden’s Chips Ban scenario and Nvidia’s updated Price Target
«The 2-minute version»
🫳🎤Biden Drops the Mic With AI Rules: On their way out, the outgoing Biden administration released their final AI export rules - the AI Diffusion Interim Final Rule (IFR). The IFR focuses on safeguarding GenAI tools from adversarial nations (like China) while enabling selective global access through a tiered licensing system. Plus it also introduces stringent export controls on advanced AI chips and technologies, impacting Nvidia and other U.S. firms.
🛑Nvidia’s AI Party Might Get a Noise Complaint: The IFR targets Nvidia's high-performance AI chips, including the H100 and A100 series, potentially curbing growth from Sovereign AI and international markets. This could affect up to 50% of Nvidia's revenue derived from outside the U.S., impacting its projected $10 billion Sovereign AI revenue in 2024.
👮Hyperscalers as Gatekeepers: The IFR allows vetted U.S. hyperscalers like Microsoft and Amazon to act as intermediaries for Tier 2 countries. However, this could erode Nvidia’s operating margins as hyperscalers take on economic leverage in these transactions.
🛠️Will Trump 2.0 Fix Or Flip AI Diffusion IFR: The incoming Trump administration’s stance on the IFR is uncertain, balancing industry-friendly deregulation with anti-China competition. In the meantime, Nvidia’s future growth and market position hinge on potential revisions or rescission of the IFR by May 15, 2025.
📈Believe it or not, there is still upside in Nvidia: Just don’t expect the stock to go to the moon again. There are regulatory challenges but our outlook factors in regulatory headwinds plus Blackwell’s supply that’s sold out for the next twelve months. Read below to find out our growth outlook and price target for the stock.
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🎥Let’s set the stage
The curtains closed on Joe Biden’s era of Bidenomics this week, making way for the incoming Trump 2.0 administration to take his place.
As is customary with all outgoing presidents, former President Biden gave his farewell address to America last week that included a list of wins for the outgoing administration. Chief among the wins that the former president counted is GenAI, which according to him is“the most consequential technology of our time—perhaps of all time.”
So, if GenAI is “the most consequential technology of our time,” would that make Nvidia NVDA 0.00%↑ perhaps the most consequential company of of our time? After all, Nvidia did provide all the necessary compute power and systems to be the brain of most GenAI models that are commercialized today.
But to be the most consequential technology company or the most consequential technology could also result in consequences, in this case regulation.
The Biden administration’s regulatory stance had increasingly relied on putting “safeguards” in place to prevent GenAI or the products, tools, and systems required to develop it from falling into the wrong hands. (read: China)
And this eventually led to the outgoing US administration issuing its last and perhaps the most consequential regulatory frameworks on GenAI, which is certain to impact Nvidia's 50% CAGR (compounded annual growth rate) growth rates the most once the rule fully goes live.
🌎Summarizing The AI Diffusion Chip Export Rule
In the outgoing US administration’s last few days in office, the White House issued its final piece of AI regulation that is designed around the Biden administration’s focus of “safeguarding” GenAI and the technology that enables it.
The regulatory document, or the AI Diffusion IFR (interim final rule), published last week is essentially a word salad spanning over 40 pages that details a series of export control restrictions to manage the export and security controls of any AI unit that America produces.
I am going to try my best to summarize this, but after reading the entire document, the mind does feel hazy. Hence why I called it a word salad. But I digress. (If you have questions, please feel free to raise in the comments section below, as this is new for everybody.)
To summarize the document, the IFR states 4 main things:
First, tighter export measures for advanced computing integrated circuits (ICs), computing equipment, and related technology that is used to support GenAI and is produced by an American company. The IFR uses a newly created chip performance metric called TPP, or Total Processing Performance, which is recycled from the semiconductor industry’s TOPS metric—a hardware benchmark used to measure processing capabilities of a chip. Those that want to delve deeper into the technical aspects of TOPS can read TechRadar’s teardown of TOPS.
Back to Nvidia’s impact: The US administration uses the TPP metric in the IFR as a benchmark to point out restrictions on certain countries and entities that can source the AI chips produced by American companies. These restrictions impact the sale of a wide array of Nvidia’s GPUs and systems that I will discuss in the next section.