Nvidia, AMD stock plunge after revenue sharing deal with US, but analysts eye opportunity

Nvidia and AMD stocks declined after agreeing to remit 15% of their China AI chip sales revenue to the US government to secure export licenses, potentially costing Nvidia $2.25 billion and AMD $120 million. This development led to Nvidia shares dropping 1.16% and AMD 2.3% in pre-market trading, impacting the broader semiconductor sector. While the agreement reopens access to a critical market, it introduces significant profit margin pressure, prompting a divided analyst outlook with some seeing long-term opportunity from resumed China demand and others cautioning on margin erosion and increased competition.

Analysis

Nvidia and AMD have entered a revenue-sharing agreement with the US government, remitting 15% of revenue from AI chip sales to China in exchange for securing export licenses. This development triggered an immediate negative market reaction, with Nvidia's stock declining 1.16% and AMD's falling 2.3% in pre-market trading, contributing to a broader downturn in the semiconductor sector. The deal, centered on Nvidia’s H20 and AMD's MI308 chips, presents a significant trade-off: it re-establishes access to the lucrative Chinese market but at a substantial cost, potentially eroding profit margins by up to 15 points and costing Nvidia an estimated $2.25 billion. This new margin pressure compounds existing investor concerns, as Nvidia's recent forecast already pointed to its slowest revenue growth in nearly two years. Analyst sentiment is divided; Wells Fargo raised its Nvidia price target to $220, betting that the benefits of resumed China sales will outweigh the costs, while other experts urge caution, highlighting the direct earnings impact and the growing long-term threat from domestic Chinese competitors.

Key Decisions for Investors

• Investors should consider this agreement a double-edged sword, as it removes regulatory uncertainty and re-opens a key market, potentially creating upside if Chinese demand exceeds expectations, as reflected in Wells Fargo's upgraded price target for Nvidia.
• It is critical to monitor the upcoming earnings reports from both Nvidia and AMD for specific guidance on the net impact of this 15% revenue share on gross margins and overall profitability.
• Portfolio positions in these chipmakers should be re-evaluated to account for two new significant risks: direct margin compression from the revenue-sharing deal and the heightened potential for accelerated competition from indigenous Chinese semiconductor firms.