In its quest for self-reliance in the semiconductor space, China has mandated its state-funded data center companies to use only locally made artificial intelligence (AI) chips. This directive has also unofficially been passed on to private companies. One consequence of this was on display when ByteDance, the parent company of TikTok, was asked to stop using Nvidia (NVDA) chips in its data centers.
Nvidia has historically generated about 13% of its revenue from China. This is a significant number, but it's on the decline. Going forward, this number will likely drop further, as ByteDance was Nvidia's largest Chinese customer. This is a tough pill for Nvidia investors to swallow, but it was inevitable.
Having said that, the chipmaker still has a leading market share globally. Even with its largest international market under restrictions, the company’s product roadmap and industry position are intact. As for the declining China revenue, let’s not forget that Advanced Micro Devices (AMD) recently said that its 2025 guidance fully excludes China. Other companies like ASML (ASML) and Synopsys (SNPS) have also confirmed that China revenue will drop dramatically and cannot be reliably included in guidance.
This suggests that this headwind is industry-wide and not just an Nvidia problem. The China risk has likely been priced in for some time now, and the actual consequences are simply beginning to emerge, as expected. There is, therefore, no significant downside for investors based on this news alone.
About Nvidia Stock
Nvidia designs and produces processors and related software. Its graphics processing units (GPUs), which have historically been popular in the gaming industry, are now widely used in the development of AI models. The company is headquartered in Santa Clara, California.
Its stock has returned 27.66% over the past year, outperforming the broader S&P 500 Index ($SPX) despite a post-earnings dip.
The uncertainty surrounding the stock has brought the valuation down, giving new investors a good entry point. Historically, Nvidia has enjoyed high valuations, and the company has largely delivered. Recently, though, the stock price dip has brought it down below its five-year averages. For example, the current forward P/E of 38.54x is 33% below the five-year average of 58.04x. This suggests investors are already pricing in headwinds and a possible slowdown in growth.
These headwinds don’t undermine Nvidia’s long-term bull thesis, and the stock is therefore a good buy at these levels. Nvidia’s earnings per share (EPS) growth rate is expected to stay above 50% for both 2026 and 2027, which makes the multiples even more attractive.
Nvidia Beats Q3 Earnings Estimates
Nvidia announced its Q3 earnings report on Nov. 19 and beat expectations. The firm reported revenue of $57.01 billion, versus the estimated $54.92 billion, and EPS of $1.30, versus the estimated $1.25.
The current quarter is expected to be similar, with management expecting $65 billion in revenue versus consensus estimates of $61.66 billion. There are good reasons for this growth, and investors should read this if they are concerned about the China headwinds. CEO Jensen Huang reminded analysts on the earnings call that Nvidia isn’t just a company that helps train AI models. It has a crucial role to play in both post-training model usage and inference. If investors think Nvidia is going to slow down because most AI model training has already happened, they should reconsider their view.
Nvidia CFO Colette Kress also said that, just like last quarter, the company was not assuming any data center compute revenue from China. This reemphasizes that the downside from declining China revenue is already priced in. Regarding the company’s cash stockpile, Huang emphasized that stock buybacks will continue, with reinvestments into R&D.
What Are Analysts Saying About Nvidia Stock?
Nvidia is covered by 48 analysts on Wall Street, with a consensus “Strong Buy” rating. With 44 “Strong Buy” ratings out of 48, there is little doubt as to what the market expects from the stock. With the stock 16.5% below its 52-week high and a discounted valuation compared to its five-year average, investors should not worry about any restrictions from China.
On the date of publication, Jabran Kundi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
More news from Barchart