China Warns Against Nvidia H20 Chips: Here's Why That Won't Stop the AI Leader

Key Points

• The crackdown is China's response to "insulting" statements made by U.S. Commerce Secretary Howard Lutnick.

• That news did not stop Nvidia stock from rising.

• 10 stocks we like better than Nvidia ›

Nvidia (NASDAQ: NVDA) received a shock on Friday after the Chinese government told its tech companies to stop using the company's H20 chips. The Chinese government appeared to make this decision in response to statements made by Commerce Secretary Howard Lutnick regarding China's use of American technology.

Indeed, Nvidia and most other American companies have wanted to capitalize on China's growth, given the country's population of 1.4 billion. However, investors seem to have remained bullish on the stock, and the news might not be as negative for the artificial intelligence (AI) stock as some might assume. Here's why.

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Image source: Nvidia.

What prompted China to "ban" Nvidia H20 chips

China's animosity toward Nvidia started when Lutnick made some controversial statements about China.

Speaking with CNBC, Lutnick stated that Chinese companies would only get Nvidia's "fourth best" chip. He further noted, "you want to sell the Chinese enough that they get addicted to the American technology stack."

Chinese authorities called the statement "insulting." Although China has worked to transition away from American technology for some time, the country now seems determined to hasten these efforts. Thus, its government asked its regulators to find ways to move Chinese companies away from Nvidia's H20 chips.

Despite this news, Nvidia stock rose in Friday trading. Admittedly, that is likely because the Nasdaq Composite index rose nearly 1.9% during the trading day, as Federal Reserve Chair Jerome Powell strongly indicated that the Fed will cut interest rates beginning at its September meeting next month.

Nvidia stock modestly trailed this performance with a 1.7% gain, but the lack of an adverse reaction indicates investors took this news in stride.

Why it is likely not a negative for Nvidia stock

The muted reaction likely happened because Nvidia's investors are not heavily focused on the H20.

The H20 is based on Nvidia's old architecture. Competitors such as AMD and other chip design companies have either matched or surpassed the older technology. Thus, the company's competitive advantage no longer lies with this chip, and it does not command premium prices.

Instead, Nvidia's investors are more focused on its latest release, the Blackwell architecture GPU, and the upcoming Vera Rubin, which it will likely release next year. Such products are what drive premium pricing and, by extension, the company's fast-growing revenue and profit levels.

The U.S. government has long forbidden Nvidia from selling its latest technology to China. While this might be a negative under some circumstances, the struggles to meet current demand have overshadowed this concern.

In Nvidia's first quarter of fiscal 2026 (ended April 27), revenue of $44 billion rose 69% from year-ago levels. Around 89% of that revenue, or $39 billion, came from its data center segment, which designs its AI chips. That segment grew revenue by 73% compared to year-ago levels.

Moreover, the company forecast $45 billion in revenue for fiscal Q2, a 50% increase if it meets that estimate. However, investors should also note that the forecast from three months ago included an $8 billion loss in H20 revenue from export restrictions. While Nvidia may not have foreseen the latest H20 restrictions at the time, the company has a history of adapting to such limitations.

Also, since fiscal Q2 ended July 27, its results will not factor in these restrictions. Still, investors will likely await further details on this crackdown when Nvidia reports for this quarter on Aug. 27, and it remains unclear how investors will react to such news.

Nvidia and the China restrictions

Ultimately, the restrictions on H20 sales in China are unlikely to change the buy thesis on Nvidia stock.

Admittedly, this change is not a positive for the company, and losing business in such a large market, particularly for political reasons, could have more negative implications.

Nonetheless, the H20 chip does not command the premium pricing like Nvidia's latest releases, and it faces more competition in the lower ends of the market. Additionally, restrictions on the H20 are nothing new for the company, and it has already factored at least some of the lost sales from this chip into its estimates.

Considering this does not affect the company's latest technology, Nvidia bulls should not change their outlook on the stock.

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Will Healy has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.