Why Nvidia Stock Rallied on Tuesday

Key Points

• Nvidia investors have been concerned about the loss of sales to an important market.

• The company announced it would resume AI chip sales to China after a pending approval from the Trump administration.

• A number of Wall Street analysts boosted their price targets on the chipmaker in response.

• 10 stocks we like better than Nvidia ›

Shares of Nvidia (NASDAQ: NVDA) were off to the races on Tuesday, climbing as much as 5%. As of 10:27 a.m. ET, the stock was still up 4.6%.

The catalyst that sent the artificial intelligence (AI) chipmaker higher was news that the company could regain access to one of its most important markets, which sent Wall Street analysts scrambling to update their price targets.

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Image source: Nvidia.

Chips ahoy

In a blog post published after the market close on Monday, Nvidia announced that it would resume sales of its H20 chips to China. The processors were designed to meet the stringent export requirements for Chinese customers. U.S. officials had voiced concerns that the AI-centric processors could be used by the military in China, prompting the creation of these specially designed chips for that market.

The Trump administration had temporarily banned the sale of the previously approved chips, but the company noted, "The U.S. government has assured Nvidia that licenses [to sell the chips in China] will be granted, and Nvidia hopes to start deliveries soon."

In response to the announcement, Wall Street analysts were working feverishly to update their models, resulting in numerous price target increases. Melius Research was among the most bullish, maintaining its buy rating and increasing its price target to $235, up from $205. That represents potential upside of 43% compared to Monday's closing price. The analysts cited a more positive outlook on potential sales and the company's strategic growth initiatives.

Time to buy?

Investors were worried that strict export controls on the sale of graphics processing units (GPUs) to companies in China would hurt Nvidia's results, and those concerns were justified. In its fiscal first quarter (ended April 27), the company took a $4.5 billion write-off related to its H20 chips. The company had already made $4.6 billion in sales, suggesting there was roughly $9 billion at stake during the quarter. That overhang is now lifted.

And at just 30 times next year's expected earnings, the stock is attractively priced, which is why Nvidia is a buy.

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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.