Everything seemed to go right for Nvidia(NASDAQ: NVDA) last year. The chip designer saw enormous demand for its new Blackwell architecture and reported record levels of revenue and profit -- and investors rushed to buy the stock. The Dow Jones Industrial Average(DJINDICES: ^DJI) even invited Nvidia to join, and this new member delivered the best performance in the index for the year, advancing more than 170%.
But this year, things have been much more difficult for the artificial intelligence (AI) superstar. President Donald Trump announced a broad plan to tax imports from countries around the world, and that translates into higher costs for companies that import materials and products. Nvidia just so happens to be one of those companies, as it makes most of its AI chips in Taiwan.
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Of course, Nvidia isn't alone in this situation. Most tech companies rely heavily on other countries for the manufacturing of their products, and companies in other sectors, from retail to automobiles, also use imports.
However, Nvidia has attracted a great deal of attention since earnings have been so strong in recent times, and this earnings model is based on production abroad. Though tariffs definitely will be a challenge for Nvidia and others, my prediction is Nvidia will beat the tariff turmoil and the stock will soar.
Image source: Getty Images.
1. Nvidia is a step ahead
Nvidia has proved to be proactive in various situations in the past, and it's going that route this time, too. The company mainly produces its AI chips in Taiwan through Taiwan Semiconductor Manufacturing, though in recent times has moved some production to TSMC's Arizona facility. TSMC is on board with this shift to U.S. production and recently increased its investment in U.S.-based manufacturing to $165 billion. This should support Nvidia's production growth here.
Earlier this month, Nvidia announced a major move that could greatly reduce its exposure to import tariffs over time. The company has launched an effort that will result in its AI supercomputers being entirely produced in the U.S.
The company aims to manufacture as much as $500 billion in AI infrastructure through partnerships at home over the coming four years. This activity will take place at TSMC's already existing plant in Arizona, and Nvidia also is building two plants in Texas with partners Foxconn and Wistron. The company expects production to ramp up at these plants within 12-15 months.
This won't shield Nvidia from potential tariffs that could take effect in the near term, but it should reassure investors that any tariff pressure on earnings would be short-lived.
2. Tariffs may not be severe
Trump initially rolled out tariffs that included all imports, then exempted electronics so that his administration could determine a separate level of tariffs for the industry. At the moment, products such as smartphones and semiconductors don't face duties. The president's move to exempt electronics came after companies and analysts flooded social media and the news with comments and reports about how destructive the initial plan would be for the industry.
Trump's move to exempt these goods temporarily and consider a new tariff level suggests eventual tariffs may not be set at extreme levels. Another positive sign is the government's negotiations with countries regarding the general tariff plan. All of this shows flexibility exists, so tech companies might eventually negotiate if they aren't satisfied with the government's plan.
My prediction
Let's get back to my prediction. The two things above make me confident that Nvidia will beat the tariff turmoil. By that, I mean tariffs won't significantly hurt earnings growth over time. It's important to keep in mind that today, Nvidia generates strong profitability on sales, with gross margin greater than 70%, and likely has room to compensate in various areas for higher costs in the near term.
Even if we see a dip in profitability levels, I'm not expecting a decline to be huge or long-lasting. Though the U.S. manufacturing plan represents a big investment, it should increase efficiency over time and lower the risk of supply-chain disruptions.
As all of this takes shape, I won't be surprised if Nvidia's stock price soars.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
