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SUMMARY
Parkev Tatevosian, CFA, discusses Nvidia's recent breakthrough in shipping H200 chips to China after a prolonged period of regulatory friction. The analysis explores the financial implications for Nvidia, including potential upside to valuation and free cash flow projections.
MAIN POINTS
- Nvidia has begun shipping H200 chips to China after overcoming regulatory hurdles.
- Nvidia secured initial orders for 2 million H200 units from Chinese customers at $27,000 each, totaling $54 billion in sales.
- After accounting for a proposed US sales tax and operating expenses, Nvidia could realize approximately $25.8 billion in free cash flow from these sales.
- Current free cash flow estimates for Nvidia do not include any sales to China due to ongoing uncertainty, making any realized sales an upside to existing valuations.
- If sales to China proceed without further government interference, Nvidia's fair value per share could rise by 10-20%, from $305 to as much as $360.
- Nvidia is ranked among the top 12 stocks to buy, and upcoming earnings releases will be covered live for channel members.
DETAILED ANALYSIS
Nvidia has achieved a significant milestone by initiating shipments of its H200 chips to customers in China, a market that has been largely inaccessible due to complex export restrictions and regulatory friction between the US and Chinese governments. The breakthrough follows months of uncertainty, with both governments previously approving sales but actual shipments delayed. According to Bloomberg, Nvidia secured orders for 2 million H200 units from Chinese businesses at a price of $27,000 per unit, amounting to $54 billion in potential sales.
The US government has proposed a 25% sales tax on these exports, which would reduce Nvidia's net revenue from these transactions by $13.5 billion, leaving $40.5 billion. With Nvidia's gross profit margin at 75%, this could translate to roughly $30 billion in gross profit. After accounting for operating expenses of about $4.5 billion, the estimated free cash flow from these sales would be $25.8 billion.
This figure is notable because it represents a substantial addition to Nvidia's financial performance in just a few months, especially given that Chinese customers have been using older, less advanced technology and may accelerate purchases to catch up with US AI companies. Importantly, current free cash flow projections for Nvidia's fiscal year 2026, estimated at $183 billion and rising to $237 billion the following year, do not include any sales to China due to the unpredictability of regulatory approval. Therefore, any realized sales in China would be considered an upside to existing valuation models.
If Nvidia can consistently access the Chinese market without further interference, the company's fair value per share could increase by 10-20%, from $305 to as much as $360. At the time of analysis, Nvidia's stock is viewed as significantly undervalued, especially if Chinese sales materialize. The development is seen as a positive surprise for current and prospective investors, with further insights expected from upcoming earnings reports.
LINKS
- YouTube channel membership for exclusive perks and early access to videos.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a 6-step investing framework.
- Fiscal.ai investment research platform with a discount for viewers.
- Webull sign-up page with bonus shares offer.
- Subscription link for Parkev Tatevosian's free monthly Substack newsletter.