NVIDIA (NVDA, Financial) shares drop 7% after revealing a significant Q1 impact due to a $5.5 billion charge. This stems from the U.S. government's requirement for export licenses to China, including Hong Kong and Macau. While this is a one-time charge, it will affect GAAP EPS in Q1 but not non-GAAP earnings and revenue.

The $5.5 billion charge, higher than expected, relates to inventory and other costs. This suggests NVIDIA anticipates difficulties in obtaining the necessary licenses, leading to inventory write-downs.

• China sales, already impacted before the license requirement, remain below pre-curb levels as a percentage of total Data Center revenue. NVIDIA doesn't foresee significant changes in China shipments and notes growing competition in the region.
• NVIDIA has reconfigured its AI platform to meet export restrictions, delivering lower-performance chips to China. The H20 chip's performance is significantly lower than Blackwell's, limiting its use to simple models. The $5.5 billion inventory write-down may further hinder its position in China's competitive market.
• The AI Diffusion rule, effective from January 13, adds to NVIDIA's challenges, aiming to limit advanced AI chip deployment by entities posing national security threats. Compliance is required by May 15. NVIDIA warns this rule could stifle innovation and economic growth, contributing to financial uncertainty.

Before the unexpected inventory write-down, NVIDIA was already under pressure. Recent tariffs had pushed its stock to lows not seen since May 2024. The ongoing challenges in China, its fourth-largest revenue market, have led investors to be cautious, impacting peers like AMD (-6.7%), INTC (-2.9%), and AVGO (-2.5%). Despite this, NVIDIA remains a strong long-term AI investment, though volatility is expected in the coming months due to shifting trade policies.