Nvidia Faces New China Risks -- Should Investors Stay the Course?

Key Points

• Nvidia took a huge inventory charge in the first quarter because it was not able to sell its H20 chips in China.

• The company appears to have solved its export license issues with the U.S., but Beijing has new concerns.

• Nvidia reports earnings after the closing bell on Aug. 27.

• 10 stocks we like better than Nvidia ›

If you're an Nvidia (NASDAQ: NVDA) investor, then you're familiar with the roller coaster that comes with Nvidia stock -- the ups and downs as Washington and Beijing duke it out, with Nvidia and its shareholders caught in the middle.

August 22 brought another unexpected drop that may be leaving some investors shell-shocked. But I don't think it's worth getting off this ride now -- particularly as Nvidia's all-important quarterly earnings are around the corner.

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The backdoor issue

The new developments are connected to Nvidia's H20 high-functioning chips, which the company had made specifically for the Chinese market to comply with U.S. export restrictions on advanced artificial intelligence (AI) chips. The chips have been in the news a lot this year. You may remember that in the first quarter of fiscal 2026, Nvidia disclosed it took a $4.5 billion inventory charge because export restrictions prevented it from selling the H20 chips.

Then this summer, Nvidia struck a deal with the Trump administration that would open the Chinese markets to them in exchange for 15% of revenues from the H20 sales.

While the export restrictions seem to be handled, Nvidia is now facing additional problems from Beijing. China reportedly asked tech companies and AI developers not to use the H20 chips, particularly for government purposes. Beijing also approached Nvidia to ask if the chips have tracking technology that would allow them to be operated remotely. CEO Jensen Huang said the company assured the Chinese government that backdoors do not exist, but the discussions are continuing.

"As you know, [Beijing] requested and urged us to secure licenses for the H20s, for some time and I've worked quite hard to help them secure the licenses, and so hopefully this will be resolved," he told reporters in Taiwan, according to CNBC.

Media outlet The Information reported Friday that Nvidia is now asking some of its suppliers, including Amkor Technology and Samsung. Reuters reported that Nvidia also asked Foxconn to stop H20 production.

That's news that could frighten investors -- Nvidia stock is up over 30% so far this year, and sentiment has been high that the resumption of H20 sales could further fuel returns.

Image source: Getty Images.

Earnings are around the corner

Nvidia and Huang will surely have a lot to say about the H20 issue when Nvidia reports its fiscal 2026 Q2 earnings after the closing bell on Aug. 27. Analysts at Yahoo! Finance are expecting earnings per share of $1.01, versus $0.68 per share a year ago. The consensus revenue estimate is $46.12 billion, up 53% from the same quarter a year ago.

Nvidia is a powerhouse because of its overwhelming power in the graphics processing unit (GPU) market, where it's estimated to have more than 90% of the market share. And as some of the company's biggest customers said they intend to increase spending in their data centers to further power the AI and advanced computing platforms, Nvidia appears to be in a solid position for this week's report -- even without the Chinese H20 sales.

In fact, I'm suggesting that Nvidia's plan to scale back production, even temporarily, is a good one. The company already has billions of dollars in H20 inventory and took a huge charge in the first quarter because it wasn't able to move the product. Why keep building when roadblocks keep popping up in Washington and now Beijing?

Analysts surely aren't concerned. In fact, many increased their price targets on Nvidia stock in recent days.

Source: Yahoo! Finance

I'm fully expecting a solid earnings report on Aug. 27, but like other investors, I'll be keenly interested in the H20 developments. When Nvidia is finally able to freely sell in China, it will be another tailwind for the biggest publicly traded company on the planet. But it's not the only positive catalyst for Nvidia stock.

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Patrick Sanders has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.