Recently, the U.S. government has approved$NVIDIA (NVDA.US)$and $Advanced Micro Devices (AMD.US)$ Sales of its specialized AI chips to China will resume. However, this comes at a cost: 15% of all sales to China will be directly remitted to the U.S. government. This sets the stage for a high-stakes new game for the chip giant and its investors.
What impact will this have on NVIDIA?
NVIDIA's second fiscal quarter (May to July) results are already set in stone, and the revenue impact from the H20 chip will primarily be reflected in the Earnings Reports for the third and fourth quarters.
Original potential: Bernstein's initial forecast suggests that the H20 chip could generate between $15 billion and $20 billion in the second half of the year. With a 40% Net income margin, this would increase NVIDIA's full-year GAAP EPS by approximately $0.29. This represents a 7% upside compared to the Refinitiv consensus EPS estimate of $4.32 for the full fiscal year.
Impact under a 15% Tariff: The 15% government tariff is now factored in. Assuming NVIDIA fully absorbs this cost, the net income margin for the H20 chip would plummet from 40% to 25%. This would reduce the contribution to EPS to the range of $0.15 to $0.20. Consequently, the potential uplift to Refinitiv's full-year EPS estimate of $4.32 would be moderated to a more modest 3.5% to 4.7%. However, it should be noted that this is still above the current consensus full-year EPS expectation of $4.36 by Refinitiv.
What Impact Will This Have on AMD?
During the second-quarter Earnings Reports call, AMD stated that the revenue from its MI308 chip has not yet been included in the third-quarter guidance. This is primarily due to two reasons: the company has not yet obtained an export license from the U.S. Department of Commerce; and unlike NVIDIA, AMD does not have an existing inventory of MI308 chips, so delivery will take some time.
Initial Outlook: Bernstein had previously estimated that the MI308 chip could generate $1 billion in revenue in the second half of the year. With an expected net income margin of 30%, this would add approximately $0.18 to AMD's full-year GAAP EPS, representing about a 5% increase over the Refinitiv consensus estimate of $3.90.
Scenario with Tariffs: Assuming AMD fully absorbs the 15% government tariff, the net income margin for the MI308 chip would be halved to 15%. This would reduce the contribution to EPS to approximately $0.09. As a result, the expected increase in the Refinitiv full-year EPS consensus estimate of $3.90 would be reduced to around 2.5%.
What Does This Mean for Taiwan Semiconductor?
Reuters recently reported that strong demand from mainland China has prompted NVIDIA to $Taiwan Semiconductor (TSM.US)$ An order for 300,000 H20 chips has been placed. This significantly deviates from NVIDIA's initial strategy of only selling existing inventory, indicating that Taiwan Semiconductor may be restarting the H20 production line. Combined with the expected delivery timeline for AMD's MI308 chips, it appears that Taiwan Semiconductor is poised to benefit significantly from the easing of chip export controls in the second half of the year.
Three key issues investors should focus on now
Who will ultimately bear the 15% tariff? It is currently unclear how the U.S. government plans to use the revenue from the 15% tariff. If demand in the Chinese market is indeed strong and considering that the H20 and MI308 chips are price-competitive compared to domestic Chinese chips, NVIDIA and AMD may pass on the cost to customers through price increases.
Will Chinese technology giants purchase these chips? Chinese state media have raised concerns about potential security 'backdoors' in U.S. chips. It is reported that the Cyberspace Administration of China has held talks with NVIDIA, demanding an explanation of the security risks associated with the H20 chips. The stance of these official institutions could influence the procurement decisions of Chinese companies, a trend that warrants close attention.
Can production keep up? According to NVIDIA's first-quarter Earnings Reports, the company has a substantial inventory of H20 chips, which should ensure rapid initial deliveries. However, to meet sustained demand, new orders would need to be placed with Taiwan Semiconductor. Given that Taiwan Semiconductor's 5-nanometer and 4-nanometer production lines are reportedly operating at full capacity, the lead time from order placement to actual delivery could take at least two quarters. Advanced Micro Devices' second-quarter Earnings Reports indicate that its MI308 inventory is mainly in semi-finished form, adding uncertainty to its third-quarter revenue contributions due to the final assembly time. Therefore, changes in orders placed by NVIDIA and Advanced Micro Devices with Taiwan Semiconductor will be crucial indicators to watch.
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Edited by Eric Cui, Rocky
