Morgan Stanley Confirms ‘Overweight’ Rating on Nvidia

Morgan Stanley analyst Joseph Moore reiterated on April 15, an ‘Overweight’ rating on Nvidia. The price target of $162 was reaffirmed.

“H20 restrictions more abrupt than we had expected

We wrote last week that we still expected H20 to be restricted by export controls, but stopped shipments “effective immediately’ is a bit more disruptive, and the large inventory writedown is a cautionary signal. Trimming ests but remains our top pick in semis.

What happened?

Today after the close Nvidia filed an 8k (link) to disclose that the US govemment has enacted new licencing requirements for shipments of the H20 product, “and any other circuits achieving the H20’s memory bandwidth interconnect bandwidth, or combination thereof to China or companies headquartered in China along with any D5 countries.

With the expectation now that those licensing requirements will be in place indefinitely.

As a result Nvidia will see up to 5.5bn in inventory charges in the April quarter.

We are not surprised that there are limits to H20, but immediate restrictions with 3 weeks to go in the quarter, and the large inventory writedown, are likely to show some disruption.

We wrote in our note just a few days ago (What is the future of products like NVIDIA H20 for the China market?) our base case is there would be meaningful restrictions on H20.

But we didn’t know they had already been enacted (NVIDIA’s initial notification was April 9), and the magnitude of the inventory writedown at $5.5bn does likely signal stronger forward looking revenues than expected-note that $5.5bn of inventory would have driven $12 bn in revenues at gross margins approaching 60%).

We have sired the H20 revenue in the April quarter at about $5 bn, consistent with company commentary that China was less than half of the level predating prior China controls; we had expected this to decline in July, though the magnitude of the inventory writedown suggests that management was more optimistic than we had perceived.

We remain very bullish on Blackwell, but the constraint there is supply, so a more sudden reduction in H20- and given the inventory writedown, a higher revenue expectation going forward for H20 will likely be disruptive to revenue and earnings.

The last time the company was impacted by export controls, it was for the same product in China that was shipping everywhere else, so the supply could just bere routed, but here, a shutdown of H20 has no impact to the Blackwell ramp.

As a result we are trimming estimates for the next couple of quarters to remain conservative.”

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