Nvidia stock fell nearly 9% during Monday’s trading session, while the broader Nasdaq index declined by just over 2%. The market-wide sell-off coincided with U.S. President Donald Trump’s confirmation that his administration would impose 25% tariffs on imports from Canada and Mexico starting Tuesday. Additionally, Nvidia’s drop was further exacerbated by investigations into Chinese buyers suspected of bypassing U.S. export controls on advanced semiconductor chips. How will these developments affect Nvidia stock?
Tariffs Are Likely to Have a Limited Impact
We do not believe that the Trump Administration’s initial tariffs will have a material impact on Nvidia. Nvidia’s chips are primarily manufactured by TSMC in Taiwan; however, some systems and computers utilizing these chips are produced in other regions, including Mexico. It is possible that these segments of the business might experience some impact. Nonetheless, the core of Nvidia’s operations—the high-margin GPU division—should remain mostly unaffected. Last month, President Trump also suggested the possibility of a “25% or higher” tariff on all semiconductor chips imported into the United States. Investors will need to monitor this development closely, although we believe it will not have a significant impact on Nvidia’s bottom line. As of 2024, Nvidia reported an adjusted gross margin of approximately 75.5%, indicating that the cost of its imported products is likely less than 25% of its revenues. Furthermore, since Nvidia generates around 47% of its sales from the U.S., the impact on its margins is probably even more constrained. In addition, TSMC, which is Nvidia’s main contract manufacturer for GPUs, has announced plans to invest roughly $100 billion in new chip fabrication facilities in the United States. Nvidia executives have indicated that they plan to produce chips at these new facilities, potentially helping the company mitigate long-term tariff risks. However, if you are seeking growth with less volatility than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since its inception.
China’s AI Loophole Raises Concerns
The United States has implemented export control restrictions on most of Nvidia’s newest AI chipset offerings to China, with the exception of the H20 chips, due to national security concerns. Nevertheless, reports indicate that gray market resellers are utilizing entities registered outside China to purchase servers incorporating Nvidia’s latest offerings from companies based in several countries, such as Singapore, Malaysia, Taiwan, and Vietnam. This concern is substantiated by the fact that Singapore has emerged as Nvidia’s second-largest market, representing approximately $23 billion in sales in FY’25, or about 18% of revenue, compared to only $2.3 billion, or 8% of revenue, in FY’23. Singapore has now launched an investigation into these potential loopholes.
The emergence of China’s DeepSeek open-source AI model also suggests that the country is advancing significantly in AI, with both prominent startups and major companies like Alibaba and Baidu investing heavily in AI infrastructure. Should Chinese companies bypass sanctions and face stricter enforcement measures that eventually close these loopholes, Nvidia’s revenues could be affected.
Over the past four years, NVDA stock’s performance has been inconsistent, with annual returns displaying much greater volatility than the S&P 500. The stock returned 125% in 2021, -50% in 2022, 239% in 2023, and 171% in 2024. In contrast, the Trefis High Quality Portfolio, which comprises 30 stocks, exhibits significantly less volatility. It has also comfortably outperformed the S&P 500 over the last four years. Why is this the case? Overall, HQ Portfolio stocks have delivered superior returns with reduced risk compared to the benchmark index, resulting in a less turbulent performance as demonstrated in the HQ Portfolio performance metrics. In light of the current uncertain macroeconomic climate, marked by potential rate cuts and several conflicts, might NVDA experience a scenario similar to 2022 and underperform the S&P over the next 12 months, or will it experience a robust surge?
We estimate Nvidia stock to be valued at approximately $101 per share, which is about 20% below the current market price. Refer to our analysis of Nvidia valuation: Expensive or Cheap. There are several reasons why we currently hold a negative outlook on the stock. We believe that the AI wave, driven by a “fear-of-missing-out” over the past two years, might subside due to diminishing incremental performance improvements from larger models and because high-quality training data may become a bottleneck. This transition towards more efficient models could further intensify the effects of a potential slowdown for GPU manufacturers like Nvidia. Additionally, Nvidia is encountering increasing competition from companies such as AMD and even from its own clients, like Amazon, which are focusing on developing and deploying their own AI chips. Although Nvidia boasts a comprehensive software ecosystem surrounding its AI processors—including programming languages that help secure customer loyalty—the company could still face pressure. Its premium valuation might not fully account for these risks at present.
Invest with Trefis
Market Beating Portfolios | Rules-Based Wealth
Read the full article here
