By Tae Kim

Nvidia stock fell sharply on fears that the Trump administration's new restriction on chip exports to China would significantly hurt the company's business. Don't overreact to the headline.

In reality, the restrictions on H20 AI chips that Nvidia can no longer sell to China without licenses from the U.S. don't affect the company's long-term opportunity. The overall growth outlook and fundamentals for the AI industry remain intact.

Nvidia's long-term prospects for the Chinese market were already diminished after U.S. restrictions that limited China's access to the most advanced AI hardware went into effect in 2022. Nvidia specifically made its H20 chips for the Chinese market to meet those restrictions. Those rules were expected to stay in place indefinitely, especially with the current geopolitical situation, meaning future revenue from China would have been significantly curtailed as AI chip technology advanced and H20 chips became obsolete.

The financial impact should be manageable. BofA analyst Vivek Arya estimates the new H20 restrictions could have a 5% to 8% negative impact on Nvidia's calendar year 2025 revenue and a 6% to 10% hit on earnings per share, barring any bigger than expected upside from the company's latest Blackwell AI chips.

Morgan Stanley analyst Joseph Moore said the H20 restriction doesn't affect his estimates for Nvidia beyond the fiscal third quarter. "We expected [H20] to decline to minimal levels eventually anyway, with a performance threshold below 1/25th of Blackwell," he wrote. "We remain very bullish on Blackwell."

There are signs that AI innovation is still booming, and demand for AI chips is robust. OpenAI CEO Sam Altman said on social media that ChatGPT added one million users in one hour and characterized demand as "biblical" due to the incredible amount of usage for its image-generation tool. The official xAI account said its Grok service is seeing "high usage" and may experience service issues as more GPUs are added to data centers. Both OpenAI and xAI use Nvidia AI GPUs to power their services.

In addition, Nvidia said on Monday it expects to produce up to $500 billion in AI infrastructure in the U.S. with its partners within the next four years, with CEO Jensen Huang adding, "American manufacturing helps us better meet the incredible and growing demand for AI chips and supercomputers."

And today's stock move may be more exaggerated than necessary. Wall Street had expected tighter H20 export controls until a media report last week said the administration decided to forgo the restriction. The report helped spark a big rally in Nvidia's stock price.

Ultimately, restrictions on old hardware that catered to a market that would have shrunk rapidly don't affect Nvidia's growth potential and the market opportunities for its latest chips. That is what investors should focus on instead.

Write to Tae Kim at tae.kim@barrons.com

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April 16, 2025 12:32 ET (16:32 GMT)

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