Nvidia shares drop as China launches AI chip monopoly probe

Nvidia, the leading AI chip manufacturer, faces regulatory scrutiny in China as authorities launch an investigation into potential anti-monopoly violations, particularly focusing on its 2019 acquisition of Mellanox.

Market impact and current position: The investigation has caused a modest 3% decline in Nvidia’s stock, though the company maintains its remarkable 179% gain for the year.

• Nvidia has emerged as a key indicator of AI industry demand, becoming one of the market’s largest companies
• The company recently achieved a $3.5 trillion market value, briefly surpassing Apple as the world’s most valuable company
• China represents approximately 16% of Nvidia’s revenue, second only to its U.S. market share

Financial performance: Nvidia’s recent financial results demonstrate extraordinary growth driven by widespread AI adoption.

• Revenue reached $35.08 billion, representing a 94% increase from the previous year
• Profits more than doubled to $19.31 billion in the most recent quarter
• The company’s strong performance led to its recent inclusion in the Dow Jones Industrial Average, replacing Intel

Regulatory challenges: The Chinese investigation adds to mounting regulatory pressure on Nvidia’s business practices.

• The U.S. Justice Department is reportedly investigating complaints about Nvidia’s market dominance
• Competitors allege that Nvidia has threatened punitive actions against customers who simultaneously purchase from rivals
• Nvidia has responded diplomatically, stating it is “happy to answer any questions regulators may have”

Business structure and dependencies: Nvidia’s business model relies heavily on strategic partnerships and international manufacturing.

• The company designs but doesn’t manufacture its chips, depending significantly on Taiwan Semiconductor Manufacturing Co.
• The 2019 Mellanox acquisition, valued at $6.9 billion, is central to China’s investigation
• Nvidia’s GPU innovation in 1999 revolutionized PC gaming and computer graphics

Geopolitical implications: The timing and nature of China’s investigation suggest broader strategic motives.

• International finance expert David Bieri suggests the probe may be China’s way of setting the tone for future relations with the incoming administration
• Companies like Nvidia may need to revise their China strategies or budget for increased political uncertainty
• The investigation highlights the complex entanglement between U.S. technology companies and Chinese markets

Strategic outlook: While the investigation poses challenges, Nvidia’s market position and management capabilities suggest resilience.

• Analysts note Nvidia’s proven ability to navigate various forms of risk, including political challenges
• The company’s diverse market presence and strong financial performance provide a buffer against regional regulatory pressures
• The situation underscores the growing complexity of operating in the global semiconductor industry