Nvidia stock surge faces not-so-subtle risk from China
If there is anything that could dent the bull thesis on Nvidia within the next 18 to 24 months, it's China.
Lost in the enthusiasm for Nvidia's big quarter and outlook was a clear warning about China from the company's top execs.
"Given the strength of demand for our products worldwide, we do not anticipate that additional export restrictions on our Data Center GPUs, if adopted, would have an immediate material impact to our financial results," Nvidia CFO Colette Kress said. "However, over the long term, restrictions prohibiting the sale of our Data Center GPUs to China, if implemented, will result in a permanent loss and opportunity for the US industry to compete and lead in one of the world's largest markets."
China represents a significant chunk of Nvidia's data center business: 20% to 25%, depending on the quarter.
The Biden administration is reportedly eyeing new curbs on China's ability to access critical technology, and that would likely involve restricting the sale of the high-end chips Nvidia is selling to power new AI platforms.
Nvidia stock is not currently priced for the risk of a huge portion of business drying up, trading on a forward price-to-earnings multiple of 61. (Check out these other exorbitant metrics on Nvidia.)
But maybe there should be more China risk priced into Nvidia's stock.
And this also goes for other large US companies that look to China to supercharge their growth.
The Chinese economy is struggling
Hong Kong's Hang Seng Index recently slipped into a bear market. The Chinese yuan is hovering around 16-year lows. Markets are looking to China policymakers to offer more rate cuts to stem yawning weakness in the commercial property market.
Global investment banks are slashing their GDP growth targets on China to sub 5%. China's GDP in the second quarter grew about 1% from the first quarter. Household consumption on annualized basis plunged 15% in the second quarter.
All of this is terrible.
"China and its people suffered greatly during the COVID pandemic, both in terms of lives lost and economic output foregone," Peterson Institute fellow Nicholas Lardy wrote recently. "The analysis suggests that economic recovery may have begun. But it is fragile. Time will tell whether recovery takes hold or whether China is falling into a cyclical downward spiral."
How have US investors responded to this worsening situation in this supposed emerging market? With a collective yawn.
But remember, Apple has a big business in China. Starbucks has a big business in China. Walmart sources most of its merchandise from China and has stores in the country.
If China is slowing rapidly, best believe it will show up in the earnings results of large US companies that US investors love to own.
"China has actually been quite slow for the last couple of years," Cummins CEO Jennifer Rumsey told me on Yahoo Finance Live (video above). "So really at a level lower than we've seen in many years as a result of the very stringent COVID lockdown policy and the sluggish economy that we see in China. So that market for us continues to be quite depressed. We're projecting some slow recovery but really not seeing any dramatic signs of improvement in the market in China."
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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