Nvidia and AMD's 15% Revenue-Sharing Deal: Strategic Gain or Long-Term Risk?

The U.S. government's 15% revenue-sharing agreement with Nvidia and AMD to resume AI chip sales to China has ignited a firestorm of debate. On one hand, it represents a tactical win for American semiconductor giants, re-opening a critical market and generating billions for the Treasury. On the other, it raises existential questions about the durability of U.S. technological leadership, the integrity of export controls, and the long-term profitability of companies caught in a geopolitical tug-of-war. For investors, the deal is a case study in balancing near-term gains against systemic risks.

Near-Term Gains: Market Access and Revenue Replenishment

The deal's immediate benefits are clear. By granting export licenses for the H20 and MI308 chips, the Trump administration has allowed Nvidia and AMD to tap into China's insatiable demand for AI infrastructure. In 2024, China accounted for 13% of Nvidia's revenue and 24% of AMD's, and resuming sales could restore billions in lost income. For the U.S. Treasury, the 15% cut—projected to generate up to $5 billion annually—provides a windfall amid fiscal constraints.

The arrangement also aligns with the Trump administration's broader strategy of leveraging trade as a bargaining chip. By offering access to China's market, the U.S. could use the deal to negotiate concessions on rare-earth exports or other trade issues. For now, the financial calculus favors both companies and the government: Nvidia's gross margins, while reduced by 8–10%, remain competitive, and AMD's 5–7% margin hit is manageable given its smaller China exposure.

Long-Term Risks: Constitutional Quagmires and Geopolitical Backfire

The deal's legal and geopolitical risks, however, loom larger. Critics argue that the 15% cut functions as an unconstitutional export tax, violating the U.S. Constitution's Export Clause, which prohibits duties on exports. Legal scholars warn that the arrangement could face challenges in court or at the World Trade Organization (WTO), potentially invalidating the agreement and forcing costly renegotiations.

Geopolitically, the deal risks eroding the credibility of U.S. export controls. If allies perceive these restrictions as tools for revenue extraction rather than national security, they may resist aligning with U.S. policies. China, meanwhile, has already signaled skepticism, accusing U.S. chips of containing “backdoors” and accelerating its push for self-reliance in semiconductor development. Huawei's 910C chip, which rivals Nvidia's H100 in performance, underscores this shift.

There's also the question of margin sustainability. If sales to China grow, the U.S. government may demand a higher share—potentially 30–50% for advanced chips like the Blackwell line—as hinted by Trump. This could squeeze already-thin margins and deter companies from investing in R&D for Chinese-market products.

Strategic Implications for Investors

For investors, the deal presents a paradox: a short-term boost in revenue and market access, paired with long-term uncertainties. Nvidia and AMD's stock valuations hinge on their ability to dominate the AI sector, but the 15% cut introduces regulatory and geopolitical headwinds.

1. Monitor Regulatory Shifts: Legal challenges to the deal could force abrupt changes in export policies. Investors should track court rulings and congressional hearings, particularly from the House Select Committee on China.
2. Assess Margin Resilience: While the 15% cut is manageable now, watch for signs of margin compression as sales grow. Compare Nvidia's and AMD's gross margins to peers like Intel and Qualcomm.
3. Geopolitical Exposure: Diversify holdings in companies less reliant on China. Firms like Advanced Micro Devices (AMD) and Intel, which have smaller China exposures, may offer safer long-term bets.

Conclusion: A High-Stakes Gamble

The 15% revenue-sharing deal is a high-stakes gamble. It secures immediate financial and strategic gains but risks setting a dangerous precedent that could undermine U.S. technological leadership and corporate profitability. For investors, the key is to balance optimism about near-term market access with caution about the deal's long-term viability. In a world where AI is the new oil, the U.S. and its semiconductor giants are playing a game of chess—where one misstep could cost more than a pawn.