Nvidia ‘s China problem reared its head once again, underscoring why Jim Cramer said this week that the AI chipmaker’s stock has been difficult to own during the second Trump administration. In a securities filing Tuesday night, Nvidia said the U.S. government will require the company to obtain an export license to ship its H20 artificial intelligence chips to China. The requirement will be “in effect for the indefinite future,” Nvidia said. Accordingly, the company said it will book a $5.5 billion charge in its fiscal 2026 first quarter, which ends this month, tied to H20 inventory, purchase commitments, and “related reserves.” The inventory charge suggests Nvidia does not expect to be granted a license, analysts said. Shares of Nvidia were down more than 6% on the news in premarket trading. The development reinforces the notion that Nvidia — the driving force of the generative AI boom on Wall Street for the past two years, turning in extraordinary sales, profit and share-price growth during that time — finds itself in an increasingly precarious moment. Nvidia has run into geopolitical roadblocks before — in fact, the made-for-China H20 was designed to comply with restrictions instituted when Joe Biden was president. They prohibited the company from sending its most powerful AI chips to customers in China, citing national security concerns. On its way out the door, in January, the Biden administration also created a new set of export rules that created global licensing requirements for AI chips and related technology. At the time, Jim called the move “absurd.” Nevertheless, as of Wednesday, those so-called “AI diffusion” rules were still set to go into effect next month, which is another geopolitical overhang on Nvidia’s stock. President Donald Trump ‘s tariff battle with China and broader concerns about AI investments created a turbulent backdrop even before Tuesday’s disclosure. Jim said Tuesday evening on CNBC that the H20 export controls were exactly why he has recommended trimming Nvidia in recent days. “You can’t own it like you used to, meaning you have to trim,” he said. “It’s really kind of shocking, but is it really?” Jim said. “I wrote [my Sunday column] because I expect stuff like this to happen. … It’s a different world.” The $5.5 billion in inventory charges likely corresponds to at least $12 billion in revenues, based on gross margin assumptions of nearly 60%, analysts at Morgan Stanley estimated in a note to clients Wednesday. While analysts reiterated their overweight buy rating on Nvidia stock, they nevertheless lowered their sales estimates for the “next couple of quarters to remain conservative.” For its current fiscal year, analysts now expect Nvidia to generate about $190.8 billion in revenue. “This should derisk a known concern, but we aren’t completely out of the woods yet. We have said that export controls, not tariffs, are the main risk for [Nvidia],” Morgan Stanley analysts wrote, adding that “demand is price insensitive, but not allowing customers to buy their products is a limitation.” Elsewhere on Wall Street, a few firms including Piper Sandler and Bank of America lowered their price targets on Nvidia, but kept their buy ratings. Analysts at TD Cowen said despite Nvidia’s near-term challenges in China, they “remain confident” that the company is the leader in AI computing. NVDA YTD mountain Nvidia’s year-to-date stock performance. The world for Nvidia investors started to change earlier this year when, in late January, Chinese AI startup DeepSeek unveiled a capable, efficient AI model that was supposedly built at a fraction of the cost compared with similar models developed by American tech firms — causing a dramatic sell-off in shares of Nvidia and other companies tied up in the AI trade For a brief period in February, Nvidia’s stock bounced back to erase nearly all those DeepSeek losses, and CEO Jensen Huang would later make a compelling case that some of the startup’s innovations will ultimately lead to more computing demand and, by extension, more of Nvidia’s market-leading AI chips. Merits of Huang’s argument aside, the tenor of the AI trade clearly changed in a post-DeepSeek world, with more skepticism around the sustainability of AI spending and Nvidia’s blistering growth. DeepSeek’s successes may have, at least partially, contributed to the Trump administration’s crackdown on the H20. In the days following its emergence, multiple U.S. lawmakers called for tighter export controls on Nvidia chips. A report from Reuters in late February also said that Chinese tech companies such as Tencent and Alibaba were boosting their orders for the H20 due to demand for DeepSeek’s models. Sales to customers in China and Hong Kong represented 13% of Nvidia’s companywide revenue of $130.5 billion in the 12 months ended in January. In its annual report filed in February, Nvidia said its sales in China as a percentage of data center revenues — the segment that covers AI chips — remain “well below levels seen prior to the onset of export controls in October 2023.” That’s when the Biden administration toughened its first round of AI tech restrictions from the prior year. On top of DeepSeek and export controls, Trump’s tariffs and trade war with China have exacerbated investors’ concerns about Nvidia this year. The reasons are essentially two-fold. The first is about the company’s direct tariff exposure, and there’s been a lot of moving parts here since Trump initially imposed import duties on Canada and Mexico — and then granted exemptions for goods compliant with a North American trade agreement — because many AI servers contain Nvidia’s chips are assembled in Mexico then enter into the U.S. Those servers appear to be compliant with the trade deal known as the United States-Mexico-Canada Agreement, Bernstein chip analyst Stacy Rasgon said Monday on CNBC. However, uncertainty about Nvidia’s tariff impact remains elevated despite newly revealed exemptions for chips entering the U.S from China. That is because Trump has said he will soon announce so-called sectoral tariffs that apply to chips and other electronics products. Nvidia’s AI chips are mostly produced by Taiwan Semiconductor Manufacturing in Taiwan, though some recently started to be made at TSMC’s new plant in Arizona. Nvidia made that TSMC announcement on Monday alongside a pledge to produce AI supercomputers entirely in the U.S. for the first time — with production expected to be worth $500 billion over the next four years . Nvidia’s commitment evidently “buys them nothing” from the Trump administration, Jim said Tuesday night, though it’s worth noting that, according to Nvidia’s securities filing, it was first informed about the H20 license requirement on April 9. Then, on Monday, it was informed of the “indefinite future” timeline, the filing said. The second reason that Trump’s trade war has weighed on Nvidia’s share price is tied more to economic concerns, which led investors to shift toward defensive stocks that should hold up better in a recession. At a high level, the fear is that slowing economic growth could weigh on semiconductor demand overall and eventually force some of Nvidia’s biggest customers to moderate their investments into AI. “There’s risk for everybody. That’s not an Nvidia question or a Broadcom question,” Rasgon said, referencing another AI chipmaker that we also own for the Club. “Semiconductors are macro-related. Their correlation to GDP is very high, and in a recession, semiconductors tend to not do all that well. Now, I might argue, that at least for AI spending, that may be something that continues to get prioritized, particularly as it relates to productivity enhancements and things like that.” It’s too early to answer that question. How investors should treat Nvidia’s stock at this moment, however, has been clear to Jim for a few days. The new export controls that further dent its China business make that all the more apparent. (Jim Cramer’s Charitable Trust is long NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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People visit the Nvidia booth during the Apsara Conference 2024 at Yunqi Town in Hangzhou, Zhejiang Province of China, on Sept. 19, 2024.
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Nvidia‘s China problem reared its head once again, underscoring why Jim Cramer said this week that the AI chipmaker’s stock has been difficult to own during the second Trump administration.
