Nvidia Looks to Ramp Up Production of the H200 Chip. Here's Why That Might Not Necessarily Send the Stock Soaring.

At the time of this writing, Nvidia (NASDAQ: NVDA) is the most valuable company in the world, with a market cap of $4.5 trillion. And for its valuation to remain high and investors to be willing to pay a high premium for the chipmaker's stock, demand for its products needs to remain robust as well.

The company's growth rate has been slowing down, but it's still incredible at more than 60% as companies continue to invest heavily in artificial intelligence (AI). Recently, Nvidia has been looking to ramp up production of its H200 AI chips, which can be sold to China. But while that could seem like an encouraging development, here's why it might not necessarily lead to the AI stock surging in value.

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Could Nvidia be sacrificing margins in exchange for growth?

Last year, the U.S. government said it would permit the sale of H200 AI chips in exchange for a 25% cut of the revenue. In the past, the government has allowed Nvidia to sell an older chip -- the H20 -- to China, which didn't result in any significant growth for the business. But the H200 AI chips are much more advanced, and demand is "quite high" for them, according to CEO Jensen Huang.

According to sources, management has reached out to Taiwan Semiconductor Manufacturing to boost production of the chips, which are in short supply. As of the end of December, Chinese companies had already ordered more than 2 million of the chips. But the company had just 700,000 in stock.

Focusing on Chinese orders could open up a new growth avenue for Nvidia, but it might not be as profitable as its core operations if 25% of revenue has to flow back to the U.S. government. A big part of the reason Nvidia doesn't look terribly expensive despite being so highly valued is that its earnings have soared significantly over the years, and there are expectations for even more growth.

The stock trades at a forward price-to-earnings (P/E) multiple of 24, which is based on analyst expectations. The S&P 500 averages a forward P/E of 22; Nvidia doesn't trade a whole lot higher despite its enormous valuation.

However, if there are signs that its margins are coming down and its bottom-line growth may not be as strong as analysts forecast, that could weigh on the share price.

Nvidia may be vulnerable to greater geopolitical risk

Demand for H200 chips may appear strong right now, but the danger is that it could change drastically at a moment's notice. The Chinese government wants to support its homegrown companies in their chipmaking efforts to be less dependent on Nvidia. In the past, the U.S. government has banned the sale of the company's customized H20 chips to China, allegedly due to security concerns.

The uncertainty around China-U.S. relations and whether Chinese companies will be able to consistently buy Nvidia's chips could introduce much more risk into the company's valuation, especially if sales to those customers form a significant chunk of Nvidia's guidance. There are already reports that China has told companies to temporarily stop purchasing H200 chips.

Is Nvidia still a good stock?

Nvidia's fundamentals look incredible, with the company generating nearly $100 billion in profit over the trailing 12 months. But investors shouldn't forget that its recent results and even future growth are effectively priced into its high valuation today. That can make the stock a riskier investment, since a lot will ultimately depend on whether the company can not only meet but beat expectations.

If you're a long-term investor willing to hang on for multiple years, Nvidia can still be a good buy. But its returns may not be nearly as impressive as they have been in recent years. And with so much bullishness already factored into its price, a better option could be to consider other growth stocks that might not be as highly valued and dependent on AI-related growth.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.