The Trump administration is proceeding with tariffs as part of its trade policy, though the situation has evolved dramatically since the initial announcement on April 2. It has injected uncertainty into the stock market, resulting in one of the most volatile weeks in recent memory.
Investors will be watching as the situation shakes out. According to research by The Motley Fool, an analysis by The Budget Lab at Yale found that incremental tariffs on Canada, Mexico, and China would raise prices on electronics and other sectors that depend heavily on global value chains.
Nvidia (NVDA +5.93%) is a leading artificial intelligence (AI) stock due to its commanding leadership in accelerator GPU chips, which train and operate AI models in data centers. Could the Trump administration's tariff policies impede Nvidia's growth?
Nvidia feels the first ripple from trade tensions
The tariffs themselves may not affect Nvidia much. In mid-March, Nvidia CEO Jensen Huang downplayed the short-term impact tariffs would have on the company. Nvidia recently announced it began production and testing Blackwell, its flagship AI chip, in the U.S. and plans to ramp that up over the next 12 to 15 months.
However, the tariffs are a symptom of broader trade tensions between the U.S. and other countries. Tensions between the U.S. and China have boiled over in recent weeks. Nvidia disclosed it will take a $5.5 billion charge for the first quarter because of government restrictions on selling H20 GPU chips to China. The company had designed the H20 GPU to comply with existing export restrictions, so the U.S. tightening its export controls illustrates how quickly things can change.
Cloud computing holds the key
Deep-pocketed U.S. technology companies have invested rampantly in Nvidia's chips to build computing capacity, train more advanced AI models, and increase their capacity to keep up with demand. Earlier this year, estimates suggested that four companies alone -- Microsoft, Meta Platforms, Alphabet, and Amazon --could spend over $300 billion on AI data centers and infrastructure this year.
It's unclear how tariffs might impact these plans.
Cloud computing can affect Nvidia, since AI runs on the cloud. That's why some of Nvidia's best customers are the leading cloud companies (Amazon, Microsoft, and Alphabet represent over 60% of the global cloud market). These companies have repeatedly referred to capacity constraints. If cloud usage slows amid the economic uncertainty, they could pull back on their AI investments, especially if those capacity constraints ease.
Microsoft has also begun delaying or suspending multiple data center projects.
NASDAQ: NVDA
Key Data Points
Longer-term opportunities should outlast short-term challenges
Only time will tell whether the tariffs or the uncertainty they've caused will meaningfully slow Nvidia's growth. Microsoft's data center slowdown could be isolated to the company, or indicative of a broader trend. It's still too early to know until Nvidia sheds new light on what it's seeing in the market on its next earnings call.
The good news is that AI is still in its early stages. Over the coming years:
- There will be more advanced AI models.
- Broader adoption will drive significantly more AI usage.
- AI will help create applications and industries.
All these are catalysts for increased chip demand. Leading accounting firm Deloitte estimated the semiconductor industry at $627 billion last year and projects it to reach $1 trillion by 2030. Logically, AI will probably drive much of that growth. As long as Nvidia remains the authority on AI chips, the company should continue growing, regardless of tariffs.
This drop is likely a buying opportunity
Given all the economic and political uncertainty, it would be wise to exercise some caution. Fortunately, the market has done that for you.
Nvidia has fallen about 25% from its high, resulting in a price-to-earnings ratio of 38. Analysts estimate that Nvidia will grow earnings by an average of 37% annually over the next three to five years. If the business grows as expected, the stock is a bargain today at a price/earnings-to-growth (PEG) ratio of about 1.0. I think the estimates are realistic. Nvidia's adjusted earnings grew by 71% in Nvidia's fiscal year 2025 (ending Jan. 26, 2025), but that will slow as the company grows larger and AI chip spending moderates.
Now, suppose Nvidia grows earnings more slowly than expected. The stock is still a solid value if earnings growth is as low as 19% annually over the next five years. That would be a PEG ratio of 2.0 today. I am generally willing to buy excellent stocks -- and Nvidia certainly qualifies -- at PEG ratios up to 2.0 to 2.5. The investment returns wouldn't be as high, but the stock would probably still do well over the long term.
As long as AI remains on its long-term trajectory and Nvidia plays a leading role in how that plays out, the stock offers a very favorable risk-reward proposition to long-term investors today. The tariffs are likely more noise than substance in this case.
