To The Moon

The U.S. government has given $NVIDIA(NVDA)$   and $Advanced Micro Devices(AMD)$   the go-ahead to resume selling their specially designed AI chips to China. But it comes at a price: a hefty 15% cut of all sales goes directly to the U.S. government. This sets up a new high-stakes game for the chip giants and their investors. Here's what you need to know.

How Will This Affect Nvidia?

With Nvidia's Q2 fiscal quarter (May-July) already in the books, the revenue impact from H20 sales will primarily be seen in its Q3 and Q4 earnings reports.

~The Upside Potential: Initial estimates from Bernstein projected that the H20 could generate a substantial $15 to $20 billion in revenue during the second half of the year. Assuming a 40% net profit margin, this would have boosted Nvidia's full-year GAAP EPS by an estimated $0.29. This would have represented a significant 7% increase over the Refinitiv consensus full-year EPS forecast of $4.32.

~The Reality with the 15% Levy: Now, let's factor in the 15% government fee. If we assume Nvidia absorbs this cost entirely, the net profit margin on the H20 effectively drops from 40% to 25%. This would reduce the contributed EPS to a range of $0.15 to $0.20. Consequently, the potential boost to the Refinitiv full-year EPS forecast of $4.32 shrinks to a more modest 3.5% to 4.7%. It is important to note, however, that this is still an increase over the current Refinitiv full-year consensus EPS expectation of $4.36.

What's the Impact on AMD?

During its Q2 earnings call, AMD announced that revenue from its MI308 chip was not factored into its Q3 guidance. This was due to two main reasons: the company had not yet received the U.S. Commerce Department's export license, and unlike Nvidia, AMD does not have a ready stockpile of the MI308, meaning deliveries will take time.

~The Initial Outlook: Bernstein’s earlier forecasts suggested the MI308 could add $1 billion in revenue in the latter half of the year. With a projected 30% net profit margin, this would have translated to an additional $0.18 to AMD's full-year GAAP EPS, a 5% increase over the Refinitiv consensus forecast of $3.90.

~The Post-Levy Scenario: Assuming AMD bears the full 15% government fee, the net profit margin on the MI308 is effectively cut in half, from 30% to 15%. This would reduce the contributed EPS to approximately $0.09. As a result, the anticipated increase to the Refinitiv full-year EPS consensus forecast of $3.90 falls to about 2.5%.

What Does This Mean for TSMC?

Recent reports from Reuters indicated that strong demand from mainland China led Nvidia to order 300,000 H20 chips from $Taiwan Semiconductor (TSM.US)$ . This is a notable shift from Nvidia’s initial plan to sell only from its existing inventory and suggests that TSMC may be restarting its H20 production lines. When combined with the expected delivery timelines for AMD's MI308, it appears that TSMC is well-positioned to benefit from this easing of chip export regulations in the second half of the year.

Three Big Questions Investors Should Ask Now

1. Who will actually pay the 15% fee? It is currently unknown how the U.S. government plans to utilize the funds from this 15% levy. If demand in the Chinese market proves to be strong enough, and given that the H20 and MI308 are priced competitively against domestic Chinese chips, it is possible that Nvidia and AMD could raise prices to pass this cost on to their customers.

2. Will China's big tech companies even buy these chips? Official Chinese media outlets have increasingly raised concerns about potential security "backdoors" in U.S.-made chips. The Cyberspace Administration of China has reportedly met with Nvidia to demand an explanation of the security risks associated with the H20 chip. The stance of these official bodies could impact the purchasing decisions of Chinese enterprises, a trend that warrants close observation.

3. Can they make the chips fast enough? According to Nvidia's Q1 earnings report, the company has a significant inventory of H20 chips, which should allow for quick initial deliveries. However, sustained demand would require placing new orders with TSMC. With TSMC's 5nm and 4nm production lines reportedly running at full capacity, the lead time from placing an order to actual delivery could be at least two quarters. AMD's Q2 earnings report revealed that its MI308 inventory is primarily in a semi-finished state. The time required for final assembly creates uncertainty around its actual revenue contribution in Q3. Therefore, any changes in orders placed by Nvidia and AMD with TSMC will be a critical indicator to monitor.

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