Can a Potential Chip Cap Slow Nvidia Down?

Semiconductor stocks, including Nvidia (NVDA 0.78%), took a slight breather after it was reported that the Biden administration was considering a chip export cap on advanced semiconductors to certain countries. However, it was just a slight pause in Nvidia stock’s strong upward trajectory.

With Nvidia seeing strong momentum, could an export cap slow down the company in any way? Let’s take a closer look at the proposed chip cap and the potential impact it could have on the stock.

Chip cap proposal

According to a report from Bloomberg, the Biden administration is considering putting restrictions on the sales of some advanced chips by capping sales to certain countries. It would do this by limiting export licenses to these countries due to national security concerns.

The countries in question appear to be largely from the Middle East. In a bit of irony, the report comes shortly after the Commerce Department eased rules to allow the Middle East easier access to advanced AI chips.

Saudi Arabia has been at the forefront of building out data centers in the region, with The New York Times reporting earlier this year that the country targeted investing $40 billion in artificial intelligence (AI) technology in the coming years. Given Saudi Arabia’s huge amount of associated natural gas and growing stand-alone production, the country has the resources to provide cheap power to AI-hungry data centers, so its ambitions make sense.

Earlier this year, the U.S. government banned the sales of Nvidia’s newest graphics processing units (GPUs) to some countries in the Middle East, and it already has export bans linked to other countries such as China and Russia. Some countries in the region have also been accused of sending shipments to Russia.

The U.S. wants to be the world’s AI leader, so it does make some sense from a national security perspective for the government to want to limit the sales of advanced AI chips to certain countries.

Impact on Nvidia

Nvidia is the leading-advanced chipmaker in the world, as its GPUs have become the backbone of the infrastructure that powers AI-focused data centers. Thus, anything that limits the sales of advanced chips could impact it.

Meanwhile, the Middle East has been one of the fastest-growing data-center regions in the world. Much like how major U.S. tech companies have been racing to build out data centers to gain AI supremacy, so too have Saudi Arabia and the United Arab Emirates (UAE).

At the same time, large cloud providers have also turned to the region. Earlier this year, Amazon struck a deal with Saudi Arabia to build data centers in the kingdom that are expected to come online in 2026. Overall, Amazon is looking at investing over $5 billion in the projects, which will help run workloads for local companies. Alphabet and Microsoft are also active in the region, with the latter helping build out the UAE’s sovereign cloud network.

Demand for Nvidia’s GPUs is so robust that the company would likely see very little impact over the near-to-medium term if a chip cap to Middle Eastern countries were enacted. The reason is that anything targeted to be shipped to the Middle East would likely be quickly scooped up by other parties.

Large U.S. tech companies and well-funded AI start-ups, such as OpenAI and xAI, continue to have an insatiable demand for Nvidia’s GPUs as they race to build out their AI infrastructure. Capital expenditures related to AI infrastructure continue to rise, while leaders in the space, such as Alphabet and Meta Platforms, have said that their biggest risk related to AI is underinvesting. With large language models (LLMs) needing more and more compute power, and hence GPUs, to be trained on, Nvidia is still scrambling just to keep up with demand.

Image source: Getty Images.

Meanwhile, while a chip cap could impact shipments to the region, these countries would still need chips for their AI ambitions, and there is a possibility that Nvidia would be able to sell less advanced chips or slightly older technology to the region to help fill the gap. With the company accelerating its design cycle to once a year, it’s possible it would be allowed to sell its current Hopper chips to the region in a couple of years when its Rubin chip would be the latest and greatest chip technology.

Nvidia has also developed AI chips specifically designed for certain markets like China that are permissible under export rules. This is another option in the future. For the time being, though, Nvidia’s focus will be on its most advanced chips.

Given the current demand for Nvidia’s chips and comments from its largest customers, the stock remains a buy, as not even a chip cap will get in its way.