With shares having risen 1,425% over the past five years,
Nvidia
(NASDAQ: NVDA)
It stands out as the premier artificial intelligence (AI) stock, crafting the processors that other businesses utilize for running and training customer-oriented algorithms. Nonetheless, due to its leading position, the firm has drawn significant political scrutiny amid escalating tech competition between the U.S. and China.
We can explore how these and other obstacles might affect Nvidia’s stock value in the coming five years and further into the future.
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Is China a risk or an opportunity for Nvidia?
Over the next five years, China may have an outsized impact on Nvidia’s business. However, it is still unclear whether the Asian nation will be more of a threat or an opportunity. On the surface level, Nvidia’s pick-and-shovel business model protects it from much of this uncertainty.
The bullish argument is straightforward: Nvidia has the ability to supply chips to all types of customers. Despite Chinese artificial intelligence firms surpassing their American counterparts in developing customer-focused software, these businesses would continue depending on Nvidia’s technology for operating and training their systems. However, upon closer inspection, this scenario appears more complex than initially meets the eye.
The market had an adverse reaction to the introduction of DeepSeek’s R1 model in January, leading to Nvidia’s stock plummeting over 17% within a single day. Despite this, the lower-priced Chinese option was still considered.
large language model
(LLM) utilized Nvidia’s H100 chips, showing that businesses might not necessarily require the latest top-tier hardware like Blackwell GPUs to stay competitive. This also underscored the danger of possible AI intellectual property theft via a method known as distillation, where insights from an established AI model are employed to educate a newer version.
DeepSeek (along with other Chinese competitors) has shown that the
economic moat
The pool of American AI firms is far smaller than initially believed. If Nvidia’s leading clients cannot achieve the expected returns on their AI expenditures, they might become reluctant to invest large sums in Nvidia’s costly equipment.
Nvidia isn’t giving up on China
Over the coming years, China could become a big problem for Nvidia’s American clients. But that isn’t stopping the chipmaker from trying to service the crucial market, which represents 13% of its $130.5 billion in annual revenue. But that goal will be more easily set than achieved.
On April 6, the Trump administration prohibited Nvidia from shipping its H20 chips to China, resulting in a $5.5 billion write-down due to terminated contracts and excess stock. This action came after the Biden administration had barred the sale of Nvidia’s specially-designed H800 chips into this region. Every time such bans occur, Nvidia not only fails to recover the funds invested in producing these chips but also risks losing both market position and customer confidence to competitors.
Despite this setback, Nvidia remains undeterred. As stated by CEO Jensen Huang, the Chinese AI sector is anticipated to grow to around $50 billion within the next two to three years, and failing to tap into this market could result in significant losses for them. Citing sources from The Information, the corporation is reportedly working on designing an AI chip specifically adapted for compliance with the updated export restrictions imposed on China.
Stuck between a rock and a hard spot
In the coming five years, Nvidia could potentially face a difficult dilemma. Should the firm continue producing components for China, it might confront significant impairment charges should the country once again limit its exports. Additionally, offering less potent chips would put them at a competitive disadvantage against local competitors such as
Huawei
, which have their sights set on its
market share
.
In the meantime, engaging in business with China might enable Nvidia to pave the way for affordable Chinese artificial intelligence.
To ultimately surpass its large-spending American clients
Investors might prefer to hold off until some of this ambiguity clears up before thinking about taking a long-term stance in the equity.
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Will Ebiefung
does not hold any shares in the companies mentioned. However, The Motley Fool has investments in and endorses Nvidia. The Motley Fool holds a position in Nvidia.
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