Published - September 2, 2022 @ 10:56 AM (EET)

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US chip stocks tumbled Thursday after government officials told them to stop exporting cutting-edge processors for artificial intelligence to China.

Following earlier news, the main semiconductor index was down more than 3%, with Nvidia falling as much as 11% and smaller rival AMD's (Advanced Macro Devices) stock dropping nearly 6%.

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WHAT HAPPENED

In a regulatory filing Wednesday, Nvidia (NASDAQ:NVDA) said the US is concerned that these processors might be used by the military, disclosing that the chipmaker's A100 and forthcoming H100 products would require approval from the US government before they can be sold to Chinese customers.

The restrictions covered potential exports to Russia, consistent with the sanctions that global governments have put on the country after it invaded Ukraine.

However, the latest US government licensing requirements also apply to future exports to China, with Bernstein analyst Stacy Rasgon believing that these restrictions could have a lasting negative impact on Nvidia's business.

The news, he wrote,

"is clearly an incremental negative as the business may be permanently impaired."

NOW WHAT 

Nvidia, the largest chipmaker by market value in the United States, is already facing a sales slump triggered by lower demand for personal computers. Before Nvidia received the notification on Aug. 26, the company gave a disappointing forecast, saying it needed to cut shipments to reduce excess inventory. 

Moreover, CEO Jensen Huang of Nivida warned analysts in August that China was a "very large market" for the company and if it doesn’t get permission to sell the chips into China, $400 million in sales may be hurt, Nivida said. That represents about 6.8% of revenue in the fiscal third quarter.

"We are working with our customers in China to satisfy their planned or future purchases with alternative products and may seek licenses where replacements aren't sufficient," Nvidia said.

Nvidia said Thursday it can continue to ship AI chips from its Hong Kong facility through September 2023. Yet, it is still unclear whether the Chinese government might strike back with its own bans.

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So far this year, Nvidia's stock has declined by about 54%, compared to a 35% drop in the iShares Semiconductor ETF (SOXX).