News broke over the weekend that Nvidia (NASDAQ:NVDA) has agreed to pay 15% of its revenues from Chinese artificial intelligence (AI) chip sales to the US government. This is being seen as a reciprocal measure to ensure that export licences will be granted, allowing Nvidia to access the key Chinese market from now on. It’s an unusual arrangement, with some implications for Nvidia stock going forward.
Key details to note
To begin with, it’s key to discuss the numbers we’re talking about here. The 15% sales tax is based on the H20 AI accelerator chip, which Nvidia has specifically designed for the Chinese market. In the fiscal quarter that ran through to the end of April, Nvidia made $4.6bn of revenue from the chip. The report also noted a further $2.5bn worth of revenue that it couldn’t bank as export restrictions were imposed at that point.
Therefore, if we assume the same figures for a full year, this would equate to sales of $28.4bn. This would mean paying $4.26bn to the government as a result. In the 2024 calendar year, Nvidia generated $130bn in total revenue, underscoring the significant impact of the Chinese market. The initial takeaway is that the tax is significant. This is true both when you weigh it up against total revenue and when you consider the growth potential in China.
Let’s also not forget that this percentage is on revenue, not profit. Of course, Nvidia’s profitable, and the Chinese market’s lucrative. But at the same time, this figure will need to be paid on revenue, regardless of whether the company makes a profit. This puts Nvidia in a slightly uncomfortable position, in my view.
Initial stock reaction
Ahead of the US market opening Monday (August 11), Nvidia stock’s down 1.5% in pre-market trading. This shows that investors haven’t taken the news well. One significant implication is that future business dealings with the US will be linked to offering incentives. In order to get export licences, Nvidia pays a 15% tax. Usually, this isn’t how cross-border business activity takes place.
It also blurs the lines between politics and business. Investors are drawn to buying Nvidia stock for its potential for appreciation, given its chip development and pioneering work in AI. They don’t want politics mixed in. It’s muddying the waters when it comes to revenue and profit due to additional government payments or controls.
Keeping calm
Despite these concerns for it going forward, I’m not that worried. President Trump has changed his mind on various trade decisions this year, and I think this could be another case. Some form of more traditional export arrangement is likely to happen in the coming months.
This should help investors shrug off this short-term blip in the price performance. If anything, the reopening of the Chinese market is a win for the company in the long run. Therefore, even though the stock might be volatile and fall in the coming days, I think it could provide a dip for investors to consider buying.
