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The U.S. could get 'more aggressive' on regulating chip sales to China: Analyst

CFRA Research Senior Equity Analyst Angelo Zino joins Yahoo Finance Live to examine the state of the semiconductor industry as U.S. officials seek to restrict chip sales to China, including how this may impact manufacturers like Nvidia and the CHIPS Act.

Video Transcript

SEANA SMITH: Well, one stock, though, that's not participating in today's gains, actually one of the worst performers in the S&P today, is NVIDIA. Shares sinking, hitting a new 52-week low on news that the US government is imposing new restriction on sales of its chips to China. Joining us now for more on this is Angelo Zino. He's CFRA Research senior equity analyst. Angelo, it's great to see you. You reiterated your buy rating, even though NVIDIA now has this headwind. Give us your reaction to this and why you aren't too concerned.

ANGELO ZINO: Yeah, I mean, I wouldn't say I'm not concerned. But if you're a long-term investor, I don't think you should be too concerned. I mean, at the end of the day, when you kind of look at what NVIDIA essentially announced here was $400 million in potential sales to China at risk in the October quarter here alone, essentially related to anything to its A100 GPU and more advanced than nature. They're going to roll out the H100 here over the next couple of months and quarters. And that's also going to be part of the plan here in terms of not allowing sales on that side of things.

But, you know, I think kind of the fear here is definitely the fact that the US government could kind of get more aggressive in terms of how they treat the sales of chips into China. As of right now, it looks like it's only intended to address products for military end use. But clearly, it could get more aggressive here. And I think that's the fear of the overreaction in the stock today.

But that being said, I mean, long-term investors out there should remain pretty optimistic here, given the way you kind of want to look at NVIDIA and just any type of chip stock as they kind of come down in a cyclical downturn, is you want to invest the ones that are going to see the greatest addressable market expansion on the way back. And we think NVIDIA is that type of name.

RACHELLE AKUFFO: And Angelo, when you look at the fact that chipmakers have already been under pressure this year, what are some of the nuances in NVIDIA that you think perhaps are more distinctive?

ANGELO ZINO: Yeah, I mean, listen, when you kind of look at the downturn that we're experiencing this year, it is absolutely a consumer-led industry downturn. So companies that are more exposed to the consumer side of things, right, the PCs, the smartphones of the world, obviously, on the gaming side of things specifically for NVIDIA, those are the companies that are being pressured and hurt the most in this type of market. On NVIDIA's side of things, we actually think what you're seeing-- what you've seen here in this downturn has actually helped to de-risk the story a bit in terms of the gaming hit.

So in the most recent downturn, gaming was only about 30% of their revenue, these-- the smallest exposure NVIDIA has had to gaming ever. And it's clearly now become a data center play. Now, you know, that being said, we do think there are going to be some hiccups here for data centers over the next couple of quarters. But nonetheless, long-term, data centers is where you want to be exposed to. And we do think gaming finds a bottom here over the next quarter or two, another reason to be a little bit more optimistic on NVIDIA on this pullback.

SEANA SMITH: Angelo, this isn't the first time we've seen the US government ban chips that we have certainly seen them do that in the past. Do you think more bans are ahead? And what does that potentially look like for some of those other leading chip designers?

ANGELO ZINO: Yeah, I mean, I think you kind of hit the nail on the head in terms of where the risk is and that is the potential for more chips or more types of advanced technology chips to potentially see bans in the future. And I think it's really an interesting kind of what the US government here has done in recent memory. And that is, you kind of look at the NVIDIA news here at the A100 chip, and that's kind of built on Taiwan Semi's 7-nanometer technology.

The H100 is going to be built on their 4-nanometer technology. You kind look at what they did with EUVs, kind of banning EUV sales into China, that's really kind of geared towards 7-nanometer and below type of technology. So it looks like the US government is making some type of stand here at 7-nanometers and below to kind of keep that technology lead or the US government relative to what China is doing in terms of building its local manufacturing industry.

So I think there could potentially be more risk or kind of more announcements like this in the future. We would kind be looking at names like a Qualcomm or a Marvell, which could potentially be at risk in AMD, which clearly came out last night and made their comment, even though they don't expect it to be material to their business. But at the end of the day, those are the kind of some of the advanced technology companies that could potentially be at risk, given they are some of the leaders out there.

RACHELLE AKUFFO: And so, Angelo, how do you balance those headwinds with some of the upside that we potentially will see at some point, at least, with the chip side and whether-- how much, to what degree, will NVIDIA be a beneficiary of that?

ANGELO ZINO: Yeah, I mean, listen, as far as the Chips Act is concerned, we see it as more of a beneficiary to more of the foundry players out there, more of the manufacturing players out there, whether it be an Intel, Taiwan Semi, other names, some of the IDMs out there, names like an ON Semi microchip, Texas Instruments Analog Devices that could kind of utilize some of that funding towards expanding capacity.

As far as Qualcomm-- I'm sorry, as far as NVIDIA is concerned, probably don't see much of a benefit on their side of things. But again, I think this is one of those situations here. We're clearly going through a cyclical downturn here typically. And we-- the last time we saw something from a geopolitical side that really hit the industry hard was really from the Huawei ban. And at the time, it really seemed like it was the end of the world, right?

But in reality, that ended up being an absolutely great buying opportunity for chip investors out there, which kind of tells you, when you see corrections like this, when you see kind of fear on the street like this within the chip space, that's typically when you want to start buying. I'm not necessarily calling a bottom anytime here over the next day or two, but historically, if you're kind of that patient investor out there willing to look out 12 to 18 months, this ends up being a great opportunity, in our view.