Nvidia Faces Challenges as Trade Uncertainty and Competition Mount

In recent years, Nvidia (NASDAQ: NVDA) has solidified its position as a leader in the tech sector. The company has benefited enormously from a surge in demand for its advanced chips crucial for AI algorithm training and operation. However, with shares down 17% year-to-date, Nvidia is facing a hurdle due to trade uncertainties and fears of increased competition from abroad that could threaten its growth potential.

Should investors buy in during this dip, or stay clear of this tech giant? Let’s take a closer look at the situation.

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Nvidia’s Challenges Extend Beyond Tariffs

While many blame Nvidia’s current downturn on tariffs from the Trump administration, that only tells part of the story. Semiconductors currently enjoy an exemption from existing U.S. tariffs (though future changes are possible), and Nvidia has been working diligently to reposition its supply chain domestically. Most notably, the company has begun sourcing its latest Blackwell-based graphics processing units (GPUs) from Taiwan Semiconductor Manufacturing’s new facility in Arizona.

The real issue surfaced in January with the unveiling of DeepSeek R1, a Chinese large language model (LLM) that reportedly matched the performance of established models like ChatGPT despite using less sophisticated H800 chips.

Although there are ongoing discussions around the training costs and intellectual property concerns surrounding DeepSeek, it brings forward critical questions.

Firstly, could more affordable alternatives replace Nvidia’s advanced GPUs? Secondly, will the high-priced AI software industry in America be challenged by lower-cost options available in China and elsewhere? While it’s too early to provide definitive answers, the prevailing uncertainty is evidently impacting Nvidia’s stock price, despite solid growth figures.

Will Clients Shift Their Supply Chains?

As the implications of DeepSeek begin to unfold, there are signs suggesting that Nvidia’s clients may be looking to decrease their dependency on the company by developing their own hardware solutions. In February, OpenAI solidified a deal with TSMC to create its initial line of custom AI chips, slated for release in 2026.

Custom chips are tailored for specific tasks, allowing them to operate without unnecessary components, which enhances efficiency compared to Nvidia’s broad-spectrum solutions. More importantly, this strategy enables clients to bypass costly intermediaries.

Image source: Getty Images.

Nvidia’s products come at a premium. In the fiscal fourth quarter, the company reported a gross margin of 73.5%, which is notably high for a hardware firm. For context, Microsoft, the prominent software-as-a-service (SaaS) company, has a gross margin around 69%.

With custom chips, clients can acquire AI hardware closer to production costs. Other major Nvidia customers like Alphabet, Amazon, and Meta Platforms have also ventured into custom chip development. Additionally, Tesla is creating its Dojo D1 chip, which is designed for its AI supercomputer. Being a fabless chip designer, Nvidia’s business model is vulnerable to competition from its technologically advanced peers, who can negotiate directly with TSMC.

Nvidia’s Valuation Currently Appears Low

To date, Nvidia has not seen significant adverse effects on its operational performance due to the potential challenges from DeepSeek and customized chips. Revenue for the fourth quarter experienced an impressive 78% year-over-year increase, reaching $39.3 billion, primarily fueled by the success of the company’s new Blackwell AI data center chips. Net income rose by 80% to $22.1 billion.

Given this strong financial performance, Nvidia’s forward price-to-earnings (P/E) ratio of just 25 appears strikingly low. Despite this, investors may want to exercise caution before jumping in to purchase the stock until there’s more clarity surrounding these long-lasting issues.

Should You Invest $1,000 in Nvidia Today?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is on The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, also serves on The Motley Fool’s board. Randi Zuckerberg, a past market development director for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is also on The Motley Fool’s board. Will Ebiefung has no stake in mentioned stocks. The Motley Fool maintains positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.