Transcript: Nvidia’s bad day

This is an audio transcript of the Unhedged podcast episode: ‘Nvidia’s bad day’

Katie Martin
The last thing we need right now is some kind of shock to the US tech sector. And guess what? That’s exactly what we’ve got. Mad scenes in the markets this week after Nvidia, the mahoosive US-listed chipmaker, said it would take a $5.5bn hit to earnings because of new controls on sales to China. Its stock dropped 7 per cent on Wednesday. That’s a lot for a company worth $2.5tn-ish. That’s trillion with a T. Today on the show, we’re asking, is it all over for US tech? What’s going on here?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist here at FT towers in sunny London, locked and loaded for a four-day weekend. Hooray! Joining me down the line from New York City, I have a dynamic duo. It’s Aiden Reiter from the Unhedged newsletter. But also, special guest, John Foley, head of Lex and low-key tech nerd. Guys, thanks for joining! 

John Foley
Thanks for having me. 

Aiden Reiter
Hey, Katie.

Katie Martin
So listeners, if you get confused, John is the Brit with just a hint of an accent from I believe it’s Hull. Am I correct John?

John Foley
It is Hull, yeah. 

Katie Martin
(Speaking with a Hull accent) That’s what they say about that. (Laughter) This will confuse the Americans. So, John, you have been sold to me as Tech Man. Tell me what is going on with Nvidia. 

John Foley
Well, Nvidia’s stock fell this week quite dramatically, wiped off almost $200bn, billion with a B, of market capitalisation, because they said that they had discovered that the chips that they sell to China, which facilitate AI, are gonna be subject to a strict new licensing requirement, which means that they may not be able to sell them to China at all. So they’re taking a five-and-a-bit-billion-dollar accounting hit. And analysts are kind of scrambling to work out what this means for their revenue and for the growth generally.

China’s not a huge part of what Nvidia does. It’s maybe about like, in round numbers, like 15 per cent of revenue, a bit less. But it’s important, it’s an important customer. And of course the chips that Nvidia, just like backtrack a bit, like Nvidia is the company that makes the chips that make AI possible, like everyone who’s anyone in artificial intelligence is basically reliant on Nvidia’s microprocessors.

Aiden Reiter
Just stepping back a little bit, these were chips that Nvidia had already specifically designed for the Chinese market, is that right?

John Foley
Right, so because there have been restrictions on what you can sell to China for quite a long time, Nvidia cannot sell its most high-end chips to China. So it created this range called the H20 that was compatible with the rules as they then were. 

Katie Martin
Oh, was it H20? I thought it was H2O, shows what I know. 

John Foley
Oh wait, maybe . . . No, I’m sure it’s H20, I am sure it is H20. (Laughter) Because they have other ones like H200 . . . Let’s call it the H20. People can like, write in, if not. So it’s the H20 and China had been importing these chips to let you do what . . . it’s like do what you can with what you have, but now the US government is saying that even those are not acceptable and this is partly a response to what we call the DeepSeek shock from early this year when suddenly China turned out to have created this large language model, an AI model that was actually way better and seemed to have been made on a shoestring, way better than anyone thought. So that kind of sent the willies through governments that are trying to make sure that they win the AI race. And so now here we are where Nvidia may not, still might, but it may not be able to sell these chips any more into the People’s Republic of China. 

Aiden Reiter
Yeah, and crucially it was made with those weaker chips, like the H20, that were compatible with US export controls. 

John Foley
Well, yes. So it seems that DeepSeek was made with export rule-compatible chips and not that many of them as well, crucially. However, there is separately a probe going on at the moment in Congress to find out whether China has been able to get access to chips that it wasn’t supposed to. And Nvidia has been drawn into that because they’re asking for, it’s the House of Representatives committee on China, they’re asking Nvidia to give more information so they can establish whether these export controls are being sidestepped somehow. 

Katie Martin
So what’s the deal with these rules and restrictions? Is it part of the tariffs conversation or is it completely separate? 

John Foley
It’s separate really, this is the thing with chips. There are two prongs that are pinching this industry from different sides. One is, yeah, tariffs. These are physical goods that go backwards and forwards across borders. And also they make up things that go backwards and forwards multiple times. So if you have tariffs every time something crosses the border, these things can get really expensive.

But the export controls are actually different. They’re more of a security issue because AI is a national security issue for everyone for multiple reasons. One is that it’s just a big economic driver. It promotes lots of activity, it’s gonna create efficiency supposedly and change business models in national companies, so everyone wants to make sure that they’re capturing as much as they can of that activity. But also potentially don’t forget that AI is a weapon. So if anyone reaches the kind of commanding heights of AI, what we call artificial general intelligence where you’ve got AI that is as intelligent or more intelligent than humans, then that potentially becomes a very powerful geopolitical tool. America doesn’t want to see China get that first. China doesn’t wanna see America get that first. It becomes basically a new space race. And these things are kind of separate, but they’re happening at the same time. And that sucks for you if you are, for example, Nvidia or any of the other chipmakers that are reliant on free trade and also the ability to sell the products they want to the customers who want them. 

Katie Martin
Gotcha. It also sucks for you if you’re an investor, right, because, you know, there was a period a few months ago when pretty much the only thing that we talked about on this podcast, it felt like at times, was Nvidia because it came from like relative obscurity to become suddenly a $3tn company making enormous amounts of money every quarter, just churning out the profits, absolutely just dominating the world. And it became the biggest company in the world, right? And it occupied this enormous slice of the US stock market. But that means it’s got, it got itself to such a size that when it takes a hit like this, the whole market feels it. So Nasdaq was down, that’s the very sort of tech-heavy US index. That was down pretty heavily yesterday, which was Wednesday. Was it down about 3 per cent or something? The S&P 500, which is more of a kind of general index, that was down by a little bit but still a lot. Some of the indices that are really focused on tech, like the Philadelphia Semiconductor Index, how much is that down? Like 20-something per cent this year? So yeah, I guess I’m wondering, tech has had such a good run, it’s been so dominant, it’s led the entire US and global market by the nose. What’s the sense over there? Is this starting to crack a little bit? How widespread is the stress in tech? 

John Foley
It depends on how far you look back. So if you think about what we call the Trump bump, Trump gets into office, stocks kind of roll ahead, and then sag this year. And tech has sagged. As tech tends to do, it tends to move with the market and then some. So tech stocks, I had a look this morning, and the big US tech stocks, so anything over $1bn, on average, down 10 per cent since the US election. But we’re up very strongly at one point. Nvidia’s down more than that. Nvidia’s done 25 per cent. AMD, which is another chipmaker, the sort of closest rival to Nvidia, I guess, but still a very distant one, is down much more than that, like 37 per cent, 38 per cent. So tech is always more volatile.

But if you look back further, these companies are still worth way more than they used to be. So as you said, Katie, Nvidia, five years ago, no one was talking about Nvidia. In the not that distant past, Nvidia just made chips for video game, basically graphics. And then it was discovered, not by Nvidia actually, that these things also would be good for AI calculations. So the company’s now worth 15 times what it was five years ago, even now after that correction. 

Katie Martin
That’s craziness. 

Aiden Reiter
Some of what we’ve seen this year has been about the actual AI narrative, right? So will it pan out is the bigger question, but DeepSeek changed how these companies think about what they need to invest in, whether that’s big data centres, (inaudible) models, et cetera. But we’ve also just had a huge risk off of that in the US, and it seems like tech sold off the most. In your mind, is that a reflection of things changing in the AI space and the tech space? Or is that people just locking in the gains after those huge run-ups you mentioned. 

John Foley
This is actually the really interesting question for me because it could be either. I think that what’s happening is just that there is a kind of market vibe shift. For example, you take what happened to Nvidia with these export controls. That doesn’t really affect the rest of the tech sector at this stage. But you see valuations weaken because people are just a bit twitchy. And tech is a volatile industry. And so there is a kind of . . . people like the sort of hackneyed phrase like animal spirits, I guess, right? But animal spirits are dampened a bit. People are just feeling a bit less, you know, feisty or whatever. 

Katie Martin
So they’re locking in their winnings, but . . .  

John Foley
And also, they’re locking in the winnings. And there are ample winnings here, right? So there’s that. But the question of whether AI is fundamentally gonna be different from what we thought it was gonna be, whether the demand trajectory is going to change, whether the future returns from all this investment in data centres and large language models, whether that’s gonna change, I don’t think that has happened yet. I don’ think people have recalibrated their expectations of what the returns from AI are gonna be, which is a risk. Because at the moment, we’ve got the tariff crisis or the tariff adjustment or whatever you want to call it. We haven’t yet had . . .  

Katie Martin
Let’s call it a crisis. 

John Foley
Let’s call it a crisis. We haven’t yet had the AI crisis. And the AI crisis is not where people say AI is not a thing. It’s where they say, oh dear, we’ve invested way too much too soon. And if we get both of those crises together, that will be a very big event for the stock market and for the Nasdaq.

Katie Martin
Well, I mean, that’s what I was gonna ask, right? Because there’s lots of people who’ve been kind of jumping up and down on the sidelines of markets for a really long time saying AI is overhyped, AI is overvalued, most importantly, from our point of view. And there’s been a lot of people saying, you know, just you wait, one of these days, it’s gonna be just like the dotcom crash of, you now, 2000, 2001, where, you know, this whole thing is gonna fall over. What do you think are the possibilities that we are at the, you know, at the foothills of something really ugly like that? Or do you just think that AI is real and that’s just rubbish? 

John Foley
What I’m gonna say is the greatest hits of things that other people have said, because this has been so well discussed by everyone.

Katie Martin
That’s what we do for a living, John. (Laughter)

John Foley
Don’t tell them that. Here’s how I see it. So is it the dotcom bubble? I mean, not really. The dotcom bubble had a lot of business models that just made literally no sense, right. There was just no plan to make any money ever. It was the pets.coms and so on.

A comparison that’s often made instead is kind of with the telecoms bubble or the telecom infrastructure bubble, which sort of happened around the same time where there were lots of inflated valuations, but lots of money went into stuff that actually did turn out to be highly useful. Like the internet, it turns out, has been very useful for us. 

Katie Martin
I use it quite often. Yeah, yeah. 

John Foley
Yeah I do as well, now and again. So you have wasted money but you also just have redistribution of value. So a company may have invested in something and that company may no longer be here but we’re still benefiting from its efforts. So I think AI is more like that. I don’t think AI is going away. I just think that we don’t really understand exactly what it can do or what kind of impact it’s gonna have on society and on companies. But clearly the answer is it’s gonna have a big one.

It’s just a question of whether the specific businesses that are most highly valued right now are the ones that win and are still here later. I mean, think about something like OpenAI, right? OpenAI is the iconic artificial intelligence company. It’s made a lot of money. Its valuation has gone very high. They certainly advanced AI tremendously. It’s created some amazing things. ChatGPT started this whole hype cycle . . . 

Katie Martin
And that’s part of the OpenAI stable, right? 

John Foley
Yeah, yeah. ChatGPT, sorry, is the product through which you and I basically access OpenAI’s AI technology. Like, will OpenAI be the winner? Will it still be here in its current form ten years from now? Like, who knows? Maybe, maybe not. But I think the things that ChatGPT is doing for us will absolutely still be there. 

Aiden Reiter
I mean, it seems like from DeepSeek, the thing that really changed, maybe the people who got hurt the most were people like OpenAI who are the model creators, right? DeepSeek kind of showed that anybody can make a model or that it is easy to make a specialised model for individual companies. It’s not that expensive. What you do need is something to build upon. So they’re always going to be there in that regard. But it seems that OpenAI is now more of a commodity within this space. And the big implementers, so whoever can actually implement it, whether that be Meta, whether that be someone else, is going to profit. I mean, is that your take of how DeepSeek has affected some of this?

John Foley
I think that the big impact from DeepSeek — and speaking not as, like, I’m not an AI nerd in the sense that I don’t, you know, spend my hours going through different models and trying to work out exactly which one is better and which are the ones . . . 

Katie Martin
No. I do, all the time. 

John Foley
I was gonna defer to you on this case because that’s what you are of course known for. So I think what DeepSeek did was, it was the, like, good enough moment. So it was a moment when people were like, you know, actually, like it’s great that OpenAI and Google, for example, (inaudible) Perplexity, whoever is going for these like extremely ambitious goals. But actually, if I’m a business, I just kind of want something that’s good enough. And if it’s cheap, great. And that’s where the applications are. That’s where the actual usage is gonna be. And that’s where the revenue is gonna be. There are already companies using AI and companies are making money from AI. And they’re using it for fairly mundane routine things. They’re using it for their call centres. They’re using it to pull their disparate data together a bit more effectively. And you don’t necessarily need to be the absolute best ever cutting-edge AI model to give people what they want in that sense. DeepSeek was the moment where I think a lot of the innovators here were like actually, it turns out if you’re good enough, that’s fine for 90 per cent of people who are gonna pay you money. 

Katie Martin
Well, the big picture here is, you know, if it’s good enough and it’s Chinese, then fine, we’ll use it. This all plugs into the really kind of big contentious issue of the day, which is, do we need super shiny American technology? Do we even want super shiny American technology. So I was talking to a banker from an American bank over in the UK the other day, and she was saying that they were talking to a prospective European client who was saying, well, I might be interested in signing up with you guys, but I want you to keep my data in Europe or in the UK. I don’t want you snaffling my data away and putting it in the States because who knows what might happen to it over there. So I think there is a bit of a sort of vague cloud of a question mark that’s hanging over US tech to say, hang on, this is sufficiently strategic that maybe we do need some European tech champions, some Asian tech champions so that we can do this stuff ourselves and not be so beholden to these pesky Americans. Is that a risk? 

John Foley
So there are two sides to it. One is the question of geopolitical-linked risk. Do you want to have all of your precious data being managed by a company that is not part of the US government, but may be in some ways susceptible to influence from the US government? This is like the old argument for Chinese companies, right? Alibaba, say, which is a big cloud computing provider in China. It’s not state-owned, but does it have to do what the government tells it to? Like, effectively, probably yes. That was never a question with the US really. But now it kind of is a bit because we see American companies doing in some cases things that we previously thought they wouldn’t in order to keep the government happy so . . . if you’re a European business owner then yes, you are kind of thinking about that. That though might get a bit overblown, overstated sometimes.

Aiden Reiter
I mean, well, it would be lovely if every country had their own big tech giant. We’ve seen that Europe has struggled to get any tech company off the ground for a long time, right? 

Katie Martin
One thing that I always come back to with that sort of thing though, Aiden, is: is this what you Americans always say, right? There’s no alternative to US tech, there’s no alternative to the US dollar, there is no alternative to US government bonds. You guys need to like, open your minds. There’s so many people around the world who really don’t like you very much at the moment, and they’re trying to figure out how to do these important things themselves. So, I don’t know. 

Aiden Reiter
I mean, I don’t disagree, but you know, there is some pretty intense tech regulation in the EU that some would argue is stopping investment. Also, again, we don’t have a big EU tech company that is competing with these Americans. So at some point it feels like there’s something structural that has inhibited that from happening. 

John Foley
One thing to also remember is that Europe doesn’t have a stock market big enough to host a company of the size of Nvidia or Google. (True, true) It has like a billion different stock markets that don’t really talk to each other. 

Aiden Reiter
Mario Draghi over here. We got to get the unified capital markets going. 

John Foley
Exactly.

Katie Martin
I’m just saying you Americans need to be humble and act normal. That’s my number one message to Americans. OK, listen, let’s stop being mean to Americans and come back in a sec with Long/Short.

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Okie doke! It’s time for Long/Short, that part of the show where we go long a thing we love or short a thing we hate. Who should I pick on first? I’m gonna pick on Aiden first. 

Aiden Reiter
I am long Fed volatility. Fed chair Jay Powell came out this week and really hit home what I think he’s been trying to say for a while, that we don’t know what the outcome from tariffs will be, and it’s possible that will endanger the Fed’s current mission to keep price under control and make sure the US economy is still growing at a reasonable rate. As one might expect, President Donald Trump did not like that and hit back and he said he’s very excited for chair Powell’s, quote, termination. I think it’s pretty clear that he knows he can’t fire Jay Powell. But I do believe there’s going to be a lot of missives, you know, broadsides and other attacks over the Fed, and they’re gonna use their power to appoint people who might not be as non-partisan as we’re used to. So I think we’re in for a bumpy ride in the next year and a half until chair Powell’s turn ends. 

Katie Martin
He has a seriously difficult job. John, son of Hull, what you got? 

John Foley
So, sir, I’m gonna preface this by saying that I’m not telling you that you should actually short this company’s share.

Katie Martin
None of this is investment advice, people.

John Foley
Conceptually, I would short ASML, which is an enormous European maker of machines that make chips. They etch chips. Their machines are amazing. They do things like fire a laser at a moving droplet of molten tin and hit it twice in order to etch chips, so they’re really good at that. However, both, their customers seem to be delaying orders, we found out this week, and their shares fell dramatically on that, which links to all the AI things we’ve talked about before. Also, they are a company that makes stuff, ships it across borders, adds stuff to it, ships it back, et cetera, et cetera. So in a world of tariffs, they get hit multiple times on all of their enormous, expensive machines. So I think they are one to watch because they’re kind of at the heart of both the AI hype cycle and the tariff crisis. 

Katie Martin
Good one. Mine is different. I am limit short Sperm Racing. (Laughter) I don’t know if you saw that. There was a story this week in the Times, the British Times, not the New York Times. Oh, turns my stomach. Let me tell you, I’ll quote, a start-up called Sperm Racing run by four teenage entrepreneurs from the US — it’s always you lot — says it’s raised $1.5mn to stage the event at the Hollywood Palladium on April 25th, gonna pit samples taken from two healthy young university students against each other on a racetrack 20 centimetres long and modelled on the female reproductive system. It is an enormous no from me. There’s nothing good going on here. Please join me in being short. 

John Foley
I’m so short.

Aiden Reiter
I mean, I’m short, but I kind of want to find out who wins. 

Katie Martin
Oh, Aiden. The only thing is that someone on the internet quipped that it should be called Spermula 1. (Laughter) I quite like that, but everything else about it is bad and I’m not into it. So on that cheerful note to send you on your way for the long weekend, guys, the UK is not in on Monday. The US markets will be open with no adult supervision, so please don’t break them. Just please. I’m all out of patience with you lot. Listeners, we will be back in your ears on Tuesday, so listen up then.

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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackey, Gretta Cohn, and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Katie Martin. Thanks for listening.