I was very close to buying Nvidia (NASDAQ:NVDA) shares in May. After the company’s latest earnings report however, I’m glad I didn’t.
The numbers themselves were impressive. But something CEO Jensen Huang said stood out to me – and not in a good way.
China export restrictions
The latest export restrictions on Nvidia’s H20 chip have cost the firm $4.5bn in inventory it now can’t use. And it’s also set to result in an $8bn hit to revenues in the next three months.
Neither of those is positive, but what concerns me is something different. I’m more interested in the potential long-term consequences of the export restrictions.
On the subject of the US policy, Jensen Huang said the following: “China AI moves on with or without US chips. It has the compute to train and deploy advanced models. The question is not whether China will have AI – it already does. The question is whether one of the world’s largest AI markets will run on American platforms. Shielding Chinese chipmakers from US competition only strengthens them abroad and weakens America’s position.”
This is what worries me about Nvidia shares.
More replaceable than I thought
For me, understanding a company’s competitive strength is key to investing in it. With Nvidia, that means figuring out how far ahead of the competition it is and how easily they can catch up.
The trouble is, I’m not an expert in semiconductor technology. And watching Intel over the last few years has offered me a good demonstration of how quickly leadership can change in this space.
According to Jensen Huang, China can make progress in artificial intelligence without Nvidia. I see that as a sign that the company’s chips aren’t as indispensable as some investors might have thought.
I think that’s a big cause for concern. As I see it, an investment in the stock at today’s prices has to be based on the idea that the company has something unique and durable – which it might not have.
The situation is evolving
Based on the CEO’s comments, Nvidia doesn’t have an unassailable position in the GPU industry. But there’s also more at stake than just the firm’s competitive advantage.
If Huang is right, then restricting exports to China strengthens local companies and threatens US dominance in the industry. And that might cause the President to reconsider the situation.
Over the last month or so, the trade situation has evolved rapidly with different countries and industries. So I’m certainly not ruling out the possibility of the situation changing again.
Even so, I’m wary of the idea that Nvidia’s advantage isn’t as hard to emulate as I previously thought. And that makes me glad I didn’t buy the stock when I was looking at it last month.
Still good growth
At the start of the year, I predicted that Nvidia’s revenue growth was going to slow in 2025. That wasn’t because of export restrictions, it was just about the size of the company’s existing sales.
The latest update reported a 69% increase in overall sales. That’s down from the previous four quarters, but it’s still very impressive.
I’m not writing the company off, by any means. But I’m much more reluctant to consider the stock from an investment perspective after the CEO’s comments during the latest earnings report.
