Nvidia’s AI Demand Soars, But Future in China Remains Unclear Amidst Geopolitical Tensions
Nvidia’s stock experienced fluctuations on Thursday as investors processed the company’s latest earnings report, which highlighted strong artificial intelligence demand but provided little clarity regarding its prospects in China.
The company reported a 56% increase in quarterly sales, totaling $46.74 billion, slightly exceeding Wall Street’s projected figure of $46.06 billion. Adjusted earnings per share stood at $1.05, surpassing the estimated $1.01 per share by analysts.
However, these positive results were overshadowed by concerns about Nvidia’s future in China. Gene Munster of Deepwater Management remarked, “There was more noise around this quarter and the guidance and what’s implied than I can remember ever on an Nvidia quarter, let alone on any other megacap tech company. A significant portion of that noise is linked to China-related matters.”
In April, the U.S. administration prohibited Nvidia from selling its H20 chip in the market. In August, Nvidia CEO Jensen Huang negotiated a deal with President Donald Trump to reinitiate sales to China, contingent upon providing 15% of sales in the region to the government. However, this agreement has yet to be finalized.
CEO Huang estimated that the Chinese market could represent a $50 billion opportunity for Nvidia, growing at a rate of 50% annually. He suggested that there is a “real possibility” that Nvidia can sell its advanced Ampere processor in China. However, the fate of the H20 chip, specifically designed for the Chinese market, remains uncertain.
Management anticipates shipping between $2 billion and $5 billion worth of H20 revenue during the third quarter, assuming a favorable geopolitical climate. Nvidia expects this quarter’s revenue to be $54 billion, plus or minus 2%, though this figure does not account for any H20 sales in China. Analysts were expecting revenue of $53.1 billion.
Data center revenue for Q2 came up short of estimates for the second consecutive period but still increased by 56% year-on-year. The segment saw a 5% increase over Q1, slowing from the previous quarter when data center revenue grew by 10%.
Despite these minor setbacks, there was still cause for optimism among Nvidia bulls. During the post-earnings conference call with investors, Huang highlighted the significant progress made in artificial intelligence over the past year and emphasized that the build-out of AI infrastructure is still in its early stages.
“As the AI revolution gains momentum, as the AI race is now underway, capital expenditure has doubled to $600 billion per year,” Huang said. “There are five years between now and the end of the decade, and $600 billion only represents the top four hyperscalers.”
Huang predicted that $3 trillion to $4 trillion would be spent on AI infrastructure by the end of the decade.
Benchmark analysts stated in a Thursday note that Nvidia’s guidance represented “only modest upside to an already elevated Street consensus,” but overall, the report demonstrated “solid sequential and annual growth.”
“We believe Nvidia’s results are consistent with its previous objectives and are in no way indicative of a slowdown in industry-wide AI interest or investments,” the analysts, who maintain a buy rating on Nvidia’s stock, wrote in a note to clients.
The report suggested that “the playbook remains the same” for Nvidia, according to JPMorgan analysts.
“A solid beat and raise with multiple levers at play to drive upside, against the backdrop of a multi-year runway of growth for AI infrastructure spending, with NVDA in our view continuing to capture a significant majority of incremental spend (as it has over the past ~3 years),” the analysts said.