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NVIDIA (NVDA -7%) sinks today following a surprise hit to Q1 numbers. The AI titan and chip designer disclosed last night that its Q1 (Apr) results are expected to include up to around $5.5 bln in charges, or roughly 14% of the company's total Q4 (Jan) revs after the U.S. government informed the company earlier this month that exports to China, including Hong Kong and Macau, need a license. As a one-time charge, the impact will not necessarily affect non-GAAP earnings and revenue; instead, it will clip GAAP EPS in Q1.

While the restriction builds upon the Biden administration's export curbs targeting advanced AI chip exports from 2022, the dollar value is likely higher than the market anticipated. The $5.5 bln is associated with inventory and other charges, indicating that NVDA may not feel as though licenses will be easy to come by, writing down its inventory as a result.

• Sales to China had already been materially affected before the U.S. government informed NVDA of the license requirement. In Q4, as a percentage of total Data Center revenue, sales in China remained considerably below levels before the onset of export curbs. NVDA commented that it did not expect China shipments to change much, adding that conditions in the region are becoming increasingly more competitive.
• With NVDA forced to reconfigure its flagship AI platform to meet the restriction requirements to ship to China, it was already delivering chips with performance below its actual capability. Management commented in March that with the H20's performance being about 25x lower than that of Blackwell, it faced a difficult situation as these chips were only good for simple models. With NVDA now writing down $5.5 bln in inventory, it appears that it may fall further behind in an intensifying competitive landscape in China.
• Adding to NVDA's headwinds is the AI Diffusion rule that took effect on January 13 but does not require compliance until May 15. The regulations aim to curb the deployment of advanced AI chips, limiting their use by entities deemed to pose a national security threat. NVDA warned in a blog post on the effective date that the rule threatens to derail innovation and economic growth, adding that it would control technology globally. The degree to which the rule will impact NVDA's financials remains unclear but adds another layer of uncertainty.

Before last night's surprise inventory write-down, NVDA already had plenty on its plate. The tariffs announced earlier this month pushed the stock down to lows not seen since May 2024 before catching a bounce. With further headwinds facing NVDA surrounding its presence in China, its fourth-largest market by revenue, investors are steering clear for now, creating a ripple effect across semiconductors today, with peers AMD -6.7%, INTC -2.9%, and AVGO -2.5%, suffering moderate losses. NVDA remains a solid play on the long-term prospects of AI. However, the next several months may see increased volatility as investors deal with dynamic trade policies.