Nvidia faces several challenges in the Chinese market, including a U.S. block on chip exports.
Now, Chinese rival Huawei may be about to test a new high-powered chip.
Just a few years ago, Nvidia (NASDAQ: NVDA) generated more of its revenue in China than it did in the United States. But as the artificial intelligence (AI) boom took off, the U.S. started to become a bigger and bigger source of growth for the chip designer. U.S. tech giants from Amazon to Meta Platforms ramped up their AI platforms and turned to Nvidia for its top graphics processing units (GPUs) and other products and services.
As a result, Nvidia's total revenue soared, climbing in the double and triple digits quarter after quarter to reach record levels. And China was becoming a smaller and smaller part of that picture. A geographic breakdown shows Nvidia's China revenue shrank to just 16% of total sales in the fiscal 2024 year from 26% just two years earlier. And U.S. revenue soared to 44% of total sales from 16% in that time period. But this trend wasn't uniquely due to an increase in U.S. spending on AI infrastructure. This also was a result of the U.S. government's decision back in 2022 to limit exports of powerful AI tools to China.
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And pressure on Nvidia's prospects in China has intensified in recent times. This month, the U.S. informed Nvidia that it could no longer export the chip it specially designed for China to that country. To make matters worse, big Chinese rival Huawei may be preparing a new chip to challenge Nvidia there. Should investors worry about Nvidia's future in China? Let's find out.
Image source: Getty Images.
Business in the U.S.
First, it's important to remember that though government limitations on exports clearly have affected Nvidia's growth in China over the past few years, business in the U.S. and even in other countries has taken off. So Nvidia has generated significant growth -- even without a strong boost from the Chinese market.
As mentioned, this is as the AI boom picked up momentum and major U.S. technology companies lined up to order Nvidia's top-performing GPUs, or AI chips used for tasks like the training and inferencing of large language models. Though Nvidia doesn't disclose who its biggest customers are, analyst reports and comments on AI investment from tech companies have helped many investors reach the following conclusion: Microsoft, Amazon, Meta, and a few other big tech players likely are among Nvidia's biggest customers.
All of this shows that spending out of the U.S. has been a significant driver of Nvidia's recent growth.
Now, let's consider the challenges Nvidia faces in China. As mentioned, the U.S. recently told Nvidia that it would need a special license to sell chips -- even its specially designed one that met export guidelines -- to China. The U.S. to date hasn't offered any company such licenses. Meanwhile, rival Huawei might be using this moment to take market share in its home country.
Huawei's next move
The Chinese chip company is set to test a new AI chip -- a model that could rival one of Nvidia's most powerful chips, the H100 -- next month, according to a Wall Street Journal report. If this is successful, it may be very difficult for Nvidia to return to the Chinese market -- the U.S. won't allow the company to export high-performance chips there, and local customers may not want a lower-power one if they can get top performance from Huawei.
Meanwhile, Nvidia may not be done with China. The DigiTimes reported that Nvidia may be considering the development of a separate business in China, according to Wccftech. Whether this is true or not, it's clear Nvidia's resourceful chief Jensen Huang could be thinking of various options that would allow Nvidia to maintain at least some business in the country.
That said, investors probably shouldn't expect China to represent a big growth market for Nvidia any time soon. So, should investors worry about this situation?
The AI infrastructure buildout
Of course, this virtual roadblock in front of the Chinese border isn't good news for Nvidia. But it doesn't represent the end of Nvidia's supercharged growth story either. As we've seen in recent years, the company has benefited from growth in the U.S., and its move to produce more and more chips at home could support this. Nvidia said recently it would produce as much as $500 billion in AI infrastructure in the U.S. over the coming four years.
It's important to remember that the AI infrastructure buildout is far from over, and technology companies -- such as Alphabet just last week -- have spoken about their aggressive spending plans and have mentioned Nvidia as a key partner.
All of this means that, yes, Nvidia could be set to face a tough moment in China. And in the worst scenario, Huawei may even jump ahead of Nvidia in China if Nvidia can't find a way to sell its chips there. But, even in that situation, the company's business elsewhere remains strong enough to drive enormous growth over time -- and make Nvidia a fantastic bet for investors on the long-term AI story.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
