Nvidia’s bad day

Katie Martin (0:06)

Pushkin. The last thing we need right now is some kind of shock to the US tech sector. And guess what? That's exactly what we've got. Mad scenes in the markets this week after Nvidia, the Mahusiv US listed chip maker, said it would take a $5.5 billion hit to earnings because of new controls on sales to China. Its stock dropped 7% on Wednesday. That's a lot for a company worth 2.5 trillion ish dollars. That's trillion with a T. Today on the show, we're asking, is it all over for US tech? What's going on here? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in sunny London locked and loaded for a four-day weekend.

Aiden Reiter (0:58)

Hooray.

Katie Martin (0:59)

Joining me down the line from New York City, I have a dynamic duo. It's Aiden Reiter from the Unhedged newsletter, but also special guest, John Foley, head of Lex and low-key tech nerd. Guys, thanks for joining.

John Foley (1:12)

Thanks for having me, Katie.

Katie Martin (1:14)

So listeners, if you get confused, John is the Brit with just a hint of an accent from, I believe it's Hull. Am I correct, John?

John Foley (1:22)

It is Hull. Yeah.

Katie Martin (1:23)

And it's gonna snur. That's what they say about that. This will confuse the Americans. So, John, you have been sold to me as Tech Man. Tell me what is going on with Nvidia.

John Foley (1:34)

Well, Nvidia's stock fell this week quite dramatically, wiped off almost $200 billion, billion with a B of market capitalization, because they said that they had discovered that the chips that they sell to China, which facilitate AI, are going to be subject to a strict new licensing requirement, which means that they may not be able to sell them to China at all. So they're taking a five and a bit billion dollar accounting hit, and analysts are scrambling to work out what this means for their revenue, and for the growth generally. China is not a huge part of what Nvidia does. It's maybe about round numbers like 15 percent of revenue, a bit less. But it's important, it's an important customer. Of course, the chips that Nvidia, just like backtrack a bit, like Nvidia is the company that makes the chips that make AI possible. Everyone who's anyone in artificial intelligence is basically reliant on Nvidia's microprocessors.

Aiden Reiter (2:25)

Just stepping back a little bit, these were chips that Nvidia had already specifically designed for the Chinese market. Is that right?

John Foley (2:30)

Right. So because there have been restrictions on what you can sell to China for quite a long time, Nvidia cannot sell its most high-end chips to China. So it created this range called the H20 that was compatible with the rules as they then were. So China's been buying these.

Katie Martin (2:45)

Oh, was it H20? I thought it was H20. You showed what I know.

John Foley (2:49)

Oh, wait, maybe it... No, I'm sure it's H20. I'm sure it's H20. Because the other one, they have...

Aiden Reiter (2:54)

The other one's like H-O-A.

John Foley (2:56)

Yeah, let's call it the H20. People can write in, if not. So it's the H20, and China had been importing these chips to do what it... It's like, do what you can with what you have. But now the US government is saying that even those are not acceptable. And this is partly a response to what we call the deep seek shock from early this year when suddenly China turned out to have created this large language model, an AI model, that was actually way better and seemed to have been made on a shoestring, way better than anyone thought. So that kind of sent the willies through governments that are trying to make sure that they win the AI race. And so now here we are where Nvidia may not, still might, but it may not be able to sell these chips anymore into the People's Republic of China.

Aiden Reiter (3:35)

Yeah, and crucially it was made with those weaker chips, like the H20, that were compatible with US export controls.

John Foley (3:41)

Well, yes, so it seems that DeepSeek was made with export rule compatible chips and not that many of them as well, crucially. However, there is separately a probe going on at the moment in Congress to find out whether China has been able to get access to chips that it wasn't supposed to. And Nvidia has been drawn into that because they're asking for, it's the House of Representatives committee on China, they're asking Nvidia to give more information so they can establish whether these export controls are being sidestepped somehow.