In a startling update, Morgan Stanley has revised its revenue outlook for Nvidia (NVDA), expressing that the recently imposed export restrictions to China are proving to be significantly more disruptive than initially thought.

The analysts predict that Nvidia’s data center revenues could plummet by 8% to 9% in the coming quarters. This downturn is a direct result of the U.S. government's requirement for Nvidia to obtain a federal export license to sell its H20 chips to China. Alarmingly, the H20, despite being tailored for the Chinese market, is still less powerful than Nvidia's latest offerings.

In light of these changes, Nvidia anticipates a staggering $5.5 billion hit in its fiscal first quarter, indicating a lack of optimism regarding the approval of the necessary licenses, according to Morgan Stanley.

The analysts noted that the H20 chip historically accounted for approximately 12% to 13% of Nvidia's data center revenue as of April. Following the news, Nvidia’s shares plummeted nearly 7%, closing at $104.49 and dragging down other tech stocks in a wave of panic.

Deepening Concerns Over AI Partnerships

Adding to Nvidia's woes, its collaboration with the Chinese AI startup DeepSeek is now under the microscope of U.S. lawmakers. The House Select Committee on the Chinese Communist Party raised alarms over claims that DeepSeek utilized restricted Nvidia chips to develop its AI models, which they assert can maintain a competitive edge against American counterparts at a significantly lower cost.

Nvidia responded by emphasizing adherence to government regulations, stating, "The U.S. government instructs American businesses on what they can sell and where—we follow the government’s directions to the letter."

A High-Stakes Game: What Lies Ahead for Nvidia?

As the situation escalates, analysts from Wedbush described this environment as a "high-stakes poker game," suggesting that Nvidia's strong position in AI makes it a critical player with much at stake.

Optimism Remains Despite Setbacks

Nevertheless, Morgan Stanley remains bullish on Nvidia, rating it as a "top pick" with a price target of $162. They highlight the company's potential to capitalize on surging demand for AI hardware despite the troubling export restrictions.