Nvidia appears increasingly vulnerable to geopolitical tensions, particularly in the Chinese market.
Is the stock's dip a buying opportunity or a sign to stay away?
With shares down nearly 20% year to date, Nvidia(NASDAQ: NVDA) had a rough start to 2025. The massive artificial intelligence (AI) chipmaker has proven vulnerable to trade and geopolitical uncertainty during the opening months of the Trump administration, which could seriously undermine its business in China.
Let's dig deeper to determine whether investors should view this dip as a buying opportunity or a signal to stay away from Nvidia stock.
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A catch-22 situation in China?
Nvidia's China trouble came to a head on April 16 when the Trump administration imposed new restrictions on the exports of its H20 AI chips to the country. This hardware was specifically designed to comply with Biden-era regulations, which blocked sales of its more powerful flagship chips like the A100 and H100 to China. The new ban led to a $5.5 billion impairment charge as Nvidia must now write down the value of its massive inventory and purchase commitments for the H20 program.
This situation is quite complicated for Nvidia, as it offers a mix of potential advantages and disadvantages. For starters, the H20 is believed to have helped the Chinese AI start-up DeepSeek develop its R1 and V3 models, which can match American industry leader ChatGPT on some benchmarks at a fraction of the cost.
Intense competition from China promises to squeeze potential margins in the AI software market, which could undermine Nvidia's biggest clients, including OpenAI, Alphabet, and Meta Platforms. As a result, these companies may become less willing to invest billions into an industry trapped in a race to the bottom.
By selling H20 chips to China, Nvidia may have been hurting the long-term viability of its U.S.-reliant business model. And the chip ban may actually have a stabilizing effect on the U.S. AI industry by slowing down Chinese progress, although this theory is far from guaranteed.
Could Chinese chips overtake Nvidia?
On April 27, Chinese tech giant Huawei announced plans to test its newest and most powerful AI processor, called the 910D, which is designed to replace Nvidia's products in the country. By banning Nvidia's H20 in China, the U.S. may have inadvertently created a less competitive environment, allowing Chinese rivals to develop their domestic chip-design capabilities and eventually imitate Nvidia's business model.
The good news is that Nvidia's economic moat relies on its software solution, CUDA, which makes it easier for developers to use its chips relative to rivals. And while Huawei could eventually dominate the Chinese market, it is unlikely to challenge Nvidia's dominance outside of China anytime soon.
Even experienced chipmakers like Advanced Micro Devices, Intel, and Broadcom have yet to crack Nvidia's dominance (with a market share of 70% to 95%) in the AI chip market.
Image source: Getty Images.
Over the long term, Chinese developers could use low-cost chips designed by Huawei and other companies to compete with American AI on consumer-facing software. However, the loss of access to Nvidia products could slow them down enough for Nvidia's top clients to maintain their lead.
Should you buy the dip on Nvidia?
Nvidia's recent dip reflects more than just a reduction of hype in the AI industry. The Trump administration's decision to block the company's H20 sales to China will have a significant impact on its long-term growth. In fiscal 2025, Nvidia's China business accounted for approximately $7.9 billion, or 6% of its total sales of $130.5 billion, which is a substantial amount.
With geopolitical tensions on the rise, it may not be in Nvidia's best interest to continue developing specialized AI chips for the Chinese market, given the risk of continued bans.
That said, with a forward price-to-earnings (P/E) multiple of 25, Nvidia's valuation still looks reasonable, considering its growth rate. Fourth-quarter profits jumped 80% year over year to $19.3 billion. But stocks are only worth what someone else is willing to pay for them. Investors may doubt Nvidia's ability to sustain its epic growth rate, especially in such a speculative industry that isn't yet a significant part of the mainstream economy. Shares look like a hold until more information becomes available.
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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. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Intel, Meta Platforms, and Nvidia. The Motley Fool recommends Broadcom and recommends the following options: short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.
