Nvidia And AMD Slip In Premarket As Reports Say U.S. Will Take 15% Cut Of China AI Chip Sales

Nvidia and AMD shares fell in premarket trading following reports that both companies have agreed to pay 15% of their AI chip sales revenue from China to the U.S. government. This unconventional arrangement, reportedly a condition for securing critical China export licenses, could generate an estimated $2.25 billion for the U.S. from Nvidia's H20 chip sales and potentially $120 million from AMD's MI308 sales. The deal raises questions about the long-term profitability and pricing strategies for these companies in the crucial Chinese market, despite Nvidia stating they haven't shipped H20 to China for months.

Analysis

Nvidia and AMD are facing direct margin pressure following reports of an agreement with the U.S. government to pay a 15% levy on all revenue from AI chip sales to China. This unconventional deal, a reported precondition for securing export licenses for China-specific chips like Nvidia's H20 and AMD's MI308, introduces a significant new cost. The market's negative reaction, reflected in premarket declines of 1.16% for Nvidia and 2.3% for AMD, signals investor concern over profitability erosion. Based on company estimates, this arrangement could generate approximately $2.25 billion for the U.S. government from Nvidia's projected $15 billion in H20 sales and another $120 million from AMD's implied $800 million in MI308 sales. While the deal ostensibly reopens access to the critical Chinese market, a key uncertainty remains whether the companies can pass this 15% cost on to customers. Nvidia's statement that it has not shipped H20 chips for months adds ambiguity to the immediate timeline, but underscores the strategic desire to compete in China despite the new regulatory framework.

Key Decisions for Investors

• Investors should revise gross margin models for both Nvidia and AMD downward to account for the 15% revenue levy on their China-specific AI chip sales, directly impacting segment profitability.
• Monitor company communications and channel checks closely to determine if this new cost can be passed on to Chinese customers, as pricing power will be the key determinant of the ultimate impact on earnings.
• The regulatory overhang for U.S. semiconductor companies with China exposure has now materialized as a direct financial cost, warranting a higher risk premium on future China-derived revenue streams.
• While the news is negative for margins, the deal secures market access that was previously blocked, so consider this a new 'cost of doing business' rather than a complete loss of the Chinese market.