China is cracking down on Nvidia and Mellanox, claiming the chipmaker is not treating Chinese companies fairly, which is what was agreed when China gave the nod for the Mellanox acquisition in 2020. The move is also part of a broader trade war between the two countries, where both continue to play their cards now and then without escalating into a full-scale trade war.
We believe China won’t be too harsh on Nvidia and any controversy surrounding the Mellanox investigation is temporary. If it results in a stock price dip, it should be taken as a buy opportunity. The reason for this relates to China’s own dependence on the networking company’s equipment. But before we look at how China depends on Mellanox, let’s first understand how Mellanox fits into Nvidia’s business.
Nvidia isn’t just a chipmaker. It also creates its own software to go with the chips and its own omniverse (digital twins). On top of this, it also makes the networking equipment that goes with its chips, via Mellanox. Nvidia’s chips are so powerful and advanced that it needs to be in control of all these variables instead of depending on other companies to come through with the right technology to go with its GPUs.
As a result, all Nvidia deployments use Mellanox. Even data centers in China use networking equipment from the same company, including its supercomputing infrastructure. It is also a critical part of China’s key military equipment as well as used in many research facilities. It is a company as dear to China as it is to Nvidia. So a harsh action against Nvidia in relation to Mellanox would be a stretch.
Considering China’s reliance on Mellanox, it is also a possibility that before the US weaponizes the company, China is playing its cards. This isn’t the only move China is making. It is also controlling the export of rare earth minerals, a critical part of modern industrial and high-tech applications, to the US. In December last year, China restricted the export of Gallium, Germanium, and Antimony to the US. This wasn’t a blanket ban though, just enough to let the US know that China holds the upper hand when it comes to rare earth minerals.
In short, the pressure being put on Nvidia is just a small part of a bigger war. One could argue that if the trade war escalates and we end up having a technological race between China and the US, Nvidia could end up benefiting as there will be a race to get hold of its GPUs. Either way, we are not very worried about these developments and continue to have a bullish view of the stock.
Nvidia is 5th on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 193 hedge fund portfolios held NVDA at the end of the third quarter which was 179 in the previous quarter. While we acknowledge the potential of NVDA as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article was originally published at Insider Monkey.
