In This Article:
Key Points
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Nvidia's future has become increasingly uncertain as it grapples with increasing geopolitical tensions.
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Despite recent setbacks, the company isn't giving up on China.
With shares up 1,425% over the last five years, Nvidia (NASDAQ: NVDA) is the quintessential artificial intelligence (AI) stock, designing the chips other enterprises use to run and train consumer-facing algorithms. However, the company's dominant role has attracted political attention as the technological rivalry between the U.S. and China heats up.
Let's discuss how this and other challenges could impact Nvidia's stock price over the next half decade and beyond.
Is China a risk or an opportunity for Nvidia?
Over the next five years, China may have an outsized impact on Nvidia's business. However, it is still unclear whether the Asian nation will be more of a threat or an opportunity. On the surface level, Nvidia's pick-and-shovel business model protects it from much of this uncertainty.
The bull thesis is simple: Nvidia can sell chips to anyone. Even if Chinese AI companies outcompete their U.S. rivals on consumer-facing software, they will still rely on Nvidia's hardware to run and train their algorithms. But when we dig a little deeper, the situation isn't so clear-cut.
The market reacted negatively to the launch of DeepSeek's R1 model in January (causing Nvidia stock to drop more than 17% in a day). Even though the low-cost Chinese large language model (LLM) used Nvidia's H20 chips, it demonstrated that companies may not actually need to use Nvidia's most cutting-edge hardware (such as Blackwell GPUs) to keep up in the industry. It also highlighted the risk of potential AI intellectual property theft through a process called distillation, which involves using knowledge from an existing AI model to train a new one.
DeepSeek (and other Chinese rivals) have demonstrated that the economic moat of American AI companies is much shallower than previously thought. And if Nvidia's top customers are unable to make the profits they expect from their AI investments, they may be less willing to shell out billions on Nvidia's expensive hardware.
Nvidia isn't giving up on China
Over the coming years, China could become a big problem for Nvidia's American clients. But that isn't stopping the chipmaker from trying to service the crucial market, which represents 13% of its $130.5 billion in annual revenue. But that goal will be more easily set than achieved.