The Biden administration is reportedly considering new limits on selling certain chips to customers in China as the trade war between the two countries continues to ratchet up.

The new battleground in the ongoing trade war is in technology and not just any technology, but that which can specifically be used to build advanced artificial intelligence tools and products, which many believe could disrupt society just as significantly as the internet did. Since the roll-out of generative AI technology, such as ChatGPT, there has been a significant influx of investments into big tech and AI stocks. These sectors have been primary drivers of the broader market's gains this year.

However, this recent news could prove to be an obstacle for the giant chipmaker Nvidia (NVDA 1.63%), a major player in the AI ecosystem. Here's why.

Person working with a lot of hardware.

Image source: Getty Images.

Revenue impact

The Biden administration's potential new rules would require chipmakers such as Nvidia to obtain a license to sell certain chips used for creating AI technology to customers in countries like China. This would be a continuation of rules the same administration implemented late last year, which also sent a scare to semiconductor stocks like Nvidia.

The potential restrictions would prevent the sale of A800 chips to China. Nvidia actually created this product line in response to the U.S. administration's rules last October banning the A100 chips that were deemed too high-performance. The new rules also contemplate the ban on leasing certain cloud services to Chinese companies, which has helped many Chinese companies work around the rules from October.

Analysts expect that if the new rules are implemented, they have the potential to reduce Nvidia's revenue. Bank of America analyst Vivek Arya said in a recent research note that 7% of Nvidia's total revenue and 10% of data-center sales could be impacted if the new rules do indeed limit the sale of A800 and H800 chips to China. But Arya added that over the long haul, he doesn't expect the market opportunity in China to make up a huge percentage of Nvidia's total addressable market.

While the China restriction news adds uncertainty and impacts near-term stock momentum, we believe strength from US hyperscale customers could soak up any additional product availability (though there could be charges to convert from China-specific A800/H800 to western A100/H100 version).

Nvidia has been on a fabulous run this year, with its stock up more than 190% after the company told investors in late May that it expects to generate more than $11 billion of revenue and adjusted gross margins of 70% in the second quarter. The outlook completely blew away analysts' and the market's expectations.

Not necessarily a deal breaker

If the Biden administration goes ahead and puts these rules into place, it's going to be bad for Nvidia because it will impact revenue in a material way. The stock also trades at a big valuation of over 53 times forward earnings, so there tends to be less margin for error.

But this isn't necessarily a deal breaker for Nvidia's stock, given that the AI boom is still very likely in the early innings.

Could Nvidia's stock go down in the near term? Certainly, and I truthfully don't like buying stocks at monstrous valuations like this. But in the long haul, Nvidia's potential is still likely to be massive, so I don't necessarily fault investors for wanting to hold the stock long-term as long as they are prepared for some near-term volatility.