NVIDIA Corp (NVDA) USD0.001

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Nvidia expects to incur a $5.5bn charge alongside first quarter results in relation to US trade restrictions against its H20 chip, designed specifically for the Chinese market.

The US government informed Nvidia that it would require a licence to export the H20 chip to China. It’s unclear whether Nvidia will be successful in having a licence granted.

The shares fell 6.8% in pre-market trading.

Our view

Nvidia shares are under pressure as fresh export restrictions threaten an estimated $12bn+ in annual China H20 chip sales. The company had sidestepped earlier rules on this by making lower-performance chips just for China, but it’s unclear if it will receive a license to resume exports. For now, it’s sensible to assume those revenues are lost.

As a result, Nvidia is writing down $5.5bn in inventory, with little demand outside China for the deliberately throttled H20 chip.

The sales are significant, but not a game changer. We’d been expecting a decline in China sales over the next year or two anyway, due to rising local competition and potential restrictions. The long-term outlook remains intact, but this will weigh on 2025 results if no license is granted.

As AI adoption grows, the focus is shifting from training to putting those learnings into action (inference) which could in fact be the larger opportunity. There are some meaningful rivals emerging in the inference space, but NVIDIA offers a compelling solution to its customers.

It’s not just the powerful chips that make NVIDIA’s product so appealing, the CUDA software platform that enables users to optimise the hardware is key. We expect that NVIDIA will continue to enjoy its dominant position over the next few years. Its technological edge affords it one of the strongest gross margins in the industry and while they can move around a little, improvements are expected later this year.

The question of return on investment is also valid. For now, NVIDIA’s biggest customers, like Meta and Microsoft, are happy to build now in anticipation of the products coming down the line. Over the next year, it’s vital that those using NVIDIA hardware to build AI products start to see the benefits.

A key but often overlooked strength of NVIDIA is its capital-light model, which - paired with strong cash flow and a solid balance sheet - supports potential for buybacks and dividends, though nothing is guaranteed. This financial strength stems partly from its outsourced manufacturing approach.

However, scaling relies on key partners. While recent production bottlenecks appear resolved, there's no certainty the supply chain can keep pace with demand. That said, the next generation of computing architecture is expected to be easier to roll out.

Nvidia has been at the heart of recent market volatility, coming under pressure as investors weigh up the impact of Trump’s tariff strategy on demand. We can understand the nervousness and expect more volatility in the short term. That said, Nvidia’s strengths and the longer-term picture still look attractive to us, though there are no guarantees.

Environmental, social and governance (ESG) risk

The semiconductor sector is medium-risk in terms of ESG. Overall, this risk is managed adequately in Europe and North America but has considerable room for improvement in the Asia-Pacific region. Its reliance on highly-specialised workers means labour relations is one of the key risk drivers. Other risks worth monitoring include resource use, business ethics, product governance, and carbon emissions.

According to Sustainalytics, Nvidia’s management of material ESG risks is strong.

As the market leader in power- hungry GPU processors it’s recognised for paying close attention to the energy efficiency of it products. Business ethics concerns are addressed by Nvidia’s compliance committee, which comprises the CFO and several other senior managers. Additionally, a third-party hotline is available for both employees and third-party stakeholders to anonymously submit ethical concerns. Its human capital initiatives are also strong, which is reassuring given the talent gap in the industry. However, diversity amongst the workforce could still be improved.

The analyst holds shares in Nvidia.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Previous updates