Nvidia and Advanced Micro Devices are expected to soon receive the previously announced export licenses from the US government to sell artificial intelligence chips into China. In exchange, the companies have agreed to pay the US government 15% of the revenue from these chip sales.

Why it matters: First reported by the Financial Times, the 15% payment is unusual and surprising. Various reports suggest that no similar structure has ever been agreed upon as part of an export license.

  • We consider this news as part of a larger story in semiconductor regulations. Semis are exempt from tariffs in the US today, but they could reportedly spike to 100%. Meanwhile, manufacturers are expanding production in the US. Ultimately, we anticipate more deals coming soon.

The bottom line: We maintain our $170 fair value estimate for wide-moat Nvidia as well as our Very High Uncertainty Rating. Not only is the future size of AI still uncertain, but global regulatory environments around AI are unpredictable and can change rapidly.

  • At this point, we think of this payment as effectively a tax on the gross margin dollars of AI chip sales into China. However, the structure, and even the legality, of such payments remains in question.

We maintain our $155 fair value estimate for narrow-moat Advanced Micro Devices, as well as our Very High Uncertainty Rating. Not only is the future size of artificial intelligence still uncertain, but the global regulatory environment for AI is unpredictable and may change rapidly.

  • At this point, we think of this payment as effectively a tax on the gross margin dollars of AI chip sales into China. However, the structure and even the legality of such payments remain in question.

Coming up: We still estimate that Nvidia will sell $30 billion of AI chips into China in fiscal 2027 (which is effectively calendar 2026), and a 15% tax could reduce our fiscal 2027 net income estimates by about 4%. We don’t think the tax will stall either Nvidia’s sales or China’s adoption in any way.

  • Our $30 billion revenue estimate would represent 16% of our $182 billion data center revenue estimate for Nvidia in fiscal 2027. Before restrictions, China accounted for as much as 20% of revenue in Nvidia’s data center segment.
  • We hope to learn more about this agreement along with Nvidia’s earnings report on Aug. 27.

While we estimate that AMD’s AI rival, Nvidia, will sell $30 billion of AI chips into China in calendar 2026, we do not yet make explicit assumptions for AMD’s China AI business, as it is far smaller and more nascent.

  • Instead, we view China as a greenfield opportunity for AMD. While we think that AMD may emerge as a second source in AI accelerators in the US, Huawei is already a top-two choice for AI developers in China today, so competition will be even more robust for AMD in China.

More on Nvidia and AMD

NVDIA

Nvidia has a wide economic moat, thanks to its market leadership in graphics processing units, or GPUs, hardware and software tools needed to enable the exponentially growing market around artificial intelligence. In the long run, we expect tech titans to strive to find second-sources or in-house solutions to diversify away from Nvidia in AI, but most likely, these efforts will chip away at, but not supplant, Nvidia’s AI dominance.

Nvidia’s GPUs handle parallel processing workloads, using many cores to efficiently process data at the same time. In contrast, central processing units, or CPUs, such as Intel’s processors for PCs and servers, or Apple’s processors for its Macs and iPhones, process the data of “0’s and 1’s” in a serial fashion. The wheelhouse of GPUs has been the gaming market, and Nvidia’s GPU graphics cards have long been considered best of breed.

More recently, parallel processing has emerged as a near-requirement to accelerate AI workloads. Nvidia took an early lead in AI GPU hardware, but more important, developed a proprietary software platform, Cuda, and these tools allow AI developers to build their models with Nvidia. We believe Nvidia not only has a hardware lead, but benefits from high customer switching costs around Cuda, making it unlikely for another chip designer to emerge as a leader in AI training. Nvidia’s expansion into networking has been all the more impressive, creating another avenue that will make it hard for AI customers to withdraw from Nvidia over time.

We think Nvidia’s prospects will be tied to the AI market, for better or worse, for quite some time. We expect leading cloud vendors to continue to invest in in-house, while AMD is also working on GPUs and AI accelerators for the data center. However, we view Nvidia’s GPUs and Cuda as the industry leaders, and the firm’s massive valuation will hinge on whether, and for how long, the company can stay ahead of the rest of the pack.

AMD

Advanced Micro Devices has significant digital semiconductor expertise and is well positioned to prosper from favorable trends in data centers and artificial intelligence. We consider AMD to be one of two notable firms in graphics processing units, which are especially well suited for AI. The company may play second fiddle to Nvidia in AI GPUs, but its GPU expertise should become increasingly valuable, and lucrative, in the years ahead.

AMD’s primary products include processors and GPUs tailored to PCs, game consoles, and servers. In our view, AMD’s PC and server success stems from the rare x86 architecture license that it possesses from Intel, which allows AMD and Intel to build x86 CPUs for Microsoft Windows PCs. We view it as a heavy lift for Windows to rewrite its x86 software to work with other processors, but Apple made this move in recent years to support its internal ARM-based processors. ARM will likely gain share in the PC market, but we still expect x86-based chips from AMD and Intel to retain leadership in the Windows PC market for quite some time.

AMD has benefited from its outsourced manufacturing model, as its tight relationship with industry leader Taiwan Semiconductor enabled AMD to grab a technological lead as its rival, Intel, stumbled with its internal manufacturing roadmap. We anticipate that AMD will continue to gain market share over the next few years as Intel strives to turn it around, but AMD’s gains could last longer if Intel were to stumble further.

We think AMD’s data center business should boom over the next few years. Its server CPUs should be in high demand, as should its GPUs suited for AI workloads. AMD pegs the total addressable market for AI accelerators, such as GPUs, at higher than $500 billion by 2028. While we foresee Nvidia capturing the bulk of this value over the next several years, we think that all AI vendors and customers will seek alternatives to keep Nvidia’s dominance at bay, and AMD might be the best positioned to emerge as a second source in AI.

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