The stock market had been running higher since making its post-Liberation Day lows on April 8. The rally, however, took a big step backward, with the S&P 500 and Nasdaq Composite tumbling 2.2% and 3.1%, respectively, on April 16.
Sparking the sell-off was a startling revelation from technology Goliath Nvidia, the leader in semiconductors specifically designed to accelerate artificial intelligence applications.
Related: Analysts revisit Nvidia stock price targets as US restricts China chip sales
Nvidia announced that it had received notification from the U.S. government that it would require a license to market its top-selling AI chip in China, the H20. This would effectively close off sales to Chinese buyers. As a result, Nvidia will take a big charge against its upcoming quarterly financial results, which sent its shares tumbling 6.9%.
The news forced Wall Street to reset financial models lower, creating a widespread domino effect, given that Nvidia is the third-largest stock in both the S&P 500 and Nasdaq 100.
Nvidia shares lose some luster as AI worries mount
Nvidia is one of the most widely recognized stocks because demand for its high-end graphics processing units, or GPUs, has soared amid a flurry of interest in training and running AI apps.
Banks are using AI to hedge risks, manufacturers are evaluating its use in quality control and inventory management, retailers are exploring its use in marketing, and even the military is evaluating AI’s use on the battlefield.
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The surge in AI interest has caused a tsunami of spending on high-end servers and the semiconductors powering them, catapulting Nvidia’s share price 171% higher in 2024.
Most companies continue to invest in AI, but concerns are mounting that AI spending growth may soften because of a weakening economy and compute capacity finally catching up to demand.
Those concerns have increased recently following the launch of DeepSeek, a Chinese competitor to OpenAI’s ChatGPT and Google’s Gemini. Reportedly, DeepSeek was developed for just $6 million using older chips, rather than Nvidia’s new, expensive Blackwell line-up.
Furthermore, economists are ratcheting back their outlooks for economic growth following new tariffs likely to increase inflation, potentially leading big spenders like hyperscalers Amazon, Microsoft, and Google to rethink AI spending plans.
In 2024 alone, Microsoft, Google, and Amazon spent $192 million on capital expenditures necessary to build their businesses, up from $117 billion in 2023.
Those headwinds were already affecting Nvidia’s stock price, but the situation worsened this week when the company learned that U.S. restrictions would further limit its sales in China.
Nvidia’s China sales take a massive hit
Interest in AI development is global, but the United States has increasingly grown concerned that China’s AI research could result in programs that pose a national security risk.
As a result, the U.S. government has increasingly restricted the sale of next-generation technology to China, significantly reducing Nvidia’s sales in the country.
Historically, China represented about 20% of Nvidia’s data center sales. However, Nvidia CEO Jensen Huang says nowadays, “It’s about half of what it was before the export control.”
Most of Nvidia’s revenue in China comes from sales of its H20, an AI solution with performance metrics below the government threshold.
In 2024, H20’s estimated sales were between $12 billion and $15 billion, and major Chinese tech companies like Alibaba, Tencent, and ByteDance reportedly ordered $16 billion of H20 chips in the first quarter.
The Trump administration’s decision to restrict H20 means that Nvidia’s sales in China will likely crater, leaving the company with less valuable inventory.
As a result, Nvidia is taking a $5.5 billion charge that, according to Bank of America analysts, is likely “indicative of high probability of H20 restriction/low probability of future licenses. “
Bank of America believes the new restriction will cause a “20% hit to Q1 GAAP eps” and “a 5%-8% sales and 6% to 10% EPS impact under two scenarios of H20 at 6% or 10% of FY26/CY25E sales.”
Nevertheless, the analysts point out that shares currently trade with a price-to-earnings ratio near 20, below the 23 to 25 range where they have found footing in the past.
“We believe the stock is currently baking in FY26/CY25E EPS closer to $4/share,” wrote the analysts. “One could also argue the immediate stock decline would be unwelcome but perhaps reduce the overhang that has existed on the stock since late last year.”
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