Nvidia Is Back on Track in China. Here's What You Need to Know.

Key Points

• Nvidia, recently blocked from selling chips to China, is set to reclaim its market position there.

• The artificial intelligence (AI) chip giant says it aims to resume deliveries there “soon.”

• 10 stocks we like better than Nvidia ›

Nvidia's (NASDAQ: NVDA) business has been going strong over the past few years thanks to its dominance in the global artificial intelligence (AI) chip market. The company designs the most powerful AI chips on the market, and customers of every size have rushed to gain access to these tools to fuel their AI programs. This has helped revenue soar in the double and triple digits, and sales have come in at a high level of profitability too. As a result, Nvidia's stock has soared 980% over the past three years.

But in recent times, one particular thing has emerged as this market leader's biggest problem -- a problem that cost it billions of dollars in the latest quarter. And that's a halt to its exports to China due to U.S. export controls on advanced AI chips. Nvidia took a charge in the quarter on chips it no longer was able to sell into that market and faced the possibility of completely losing out on this market that represented 13% of its total sales last year.

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This week, though, the company announced fantastic news: The U.S. ensured Nvidia that it would receive a license to once again sell its H20 chip in China, and Nvidia also said it would launch a new chip that meets U.S. guidelines.

It looks like Nvidia is back on track in this major market -- here's what you need to know.

Image source: Getty Images.

U.S. controls on chip exports

So first, let's take a step back and consider the whole Nvidia-in-China story. The U.S. initially launched export controls back in 2022 on concerns China might use high-level technology for the development of weapons of mass destruction. As a result, U.S. companies couldn't export their top-performing chips there, and instead could only sell chips to that market that met certain restrictions. Nvidia then designed the H20, a graphics processing unit (GPU) that met the guidelines, and sold that chip to Chinese customers until this spring, when the U.S. tightened the rules.

The U.S. sent a letter to Nvidia saying it would need a license to export to China -- since such licenses had never been granted, the terrain ahead seemed difficult. Nvidia announced a $4.5 billion charge in the latest quarter for H20s it was unable to sell to China, and said it was exploring options to return to the market. Meanwhile, the company said it was removing China from all earnings guidance due to the lack of visibility.

Now let's consider the latest news. Nvidia chief Jensen Huang announced in trips to Washington, D.C., and Beijing that the company is applying to sell the H20 in China again, and the U.S. has "assured Nvidia that licenses will be granted." The company says it aims to start deliveries "soon." On top of this, the chip powerhouse says it's created a new, fully compliant chip, the RTX PRO GPU, that's well suited to digital twin AI -- a popular option for factory operations.

An AI market that could reach $50 billion

The U.S. is Nvidia's biggest market, representing nearly 47% of sales last year. So even without China, the chip designer's growth looked promising -- but at 13% of sales, as mentioned, the Chinese market isn't negligible, and growth there could offer a significant boost to overall growth. Huang has said that China's AI market could reach about $50 billion over the next couple of years.

At the same time, a presence in China allows Nvidia the opportunity to maintain its global leadership in AI -- if the company remained blocked from China, it's possible local rival Huawei would jump ahead there and even interfere with Nvidia's position in other international markets. Of course, Huawei still represents competition, but with the Chinese market open, Nvidia has the chance to actually compete rather than leave the market opportunity to others.

And considering Nvidia's innovation, there's reason to be confident about this company continuing to dominate. Though Nvidia still is restricted regarding the level of technology it can deliver to China, customers there have consistently sought out Nvidia chips -- this brand strength and Nvidia's interest in designing products specifically for China could keep the momentum going.

All this means that Nvidia's ability to sell to China is likely to equal billions of dollars for the company in the years to come, building upon an already strong presence in other areas around the world. This is fantastic news for the company and investors -- and could fuel stock price gains today and over the long term as this growth story develops.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.