Nvidia’s Earnings in Focus as U.S. Export Curbs Cloud Outlook

• Nvidia (NVDA) faces a $5.5 billion charge and $15 billion in lost China sales due to U.S. export curbs on its H20 chip, with quarterly revenue losses estimated at $3 billion to $4.5 billion.
• Despite a projected 66.2% revenue surge to $43.28 billion, adjusted gross margins are expected to drop to 67.7%, impacted by up to 12.5% from H20 write-downs.
• New opportunities in the Middle East, including a deal for 18,000 Blackwell chips in Saudi Arabia, may help offset China losses, though near-term revenue contributions are expected to be small.

Nvidia (NVDA) faces a pivotal moment as it prepares to report its first-quarter earnings on Wednesday, with investors keenly focused on how U.S. export restrictions on China will impact the company’s financial performance and future growth. The Trump administration’s recent curbs on Nvidia’s H20 chip, the only AI chip permitted for sale in China, have introduced significant uncertainty. The company disclosed that these restrictions will result in $5.5 billion in charges, with CEO Jensen Huang stating that Nvidia walked away from $15 billion in potential sales in China due to the curbs. Last year, China accounted for 13% of Nvidia’s revenue, and Huang estimated the AI chip market in China could reach $50 billion next year, underscoring the region’s importance to the company’s global strategy.

According to a Reuters report, the export limits, which affected the final three weeks of the April quarter, are estimated to have cost Nvidia approximately $1 billion in sales. For the remainder of the year, the revenue impact could range from $3 billion to $4.5 billion per quarter, with Wedbush analysts projecting a slightly lower range of $3 billion to $4 billion. These losses, as per the report, are expected to pressure Nvidia’s profitability, with adjusted gross margins forecasted to decline significantly to 67.7%, down more than 11 percentage points. Wedbush further noted that write-downs related to H20 shipments could reduce gross margins by as much as 12.5%.

Despite these challenges, Nvidia is expected to report robust first-quarter revenue of $43.28 billion, a 66.2% surge year-over-year, according to LSEG data. This growth reflects the company’s dominant position in the AI chip market, driven by demand from major cloud providers like Alphabet’s Google, which have reaffirmed their commitment to AI infrastructure investments. However, the days of consistently exceeding Wall Street expectations may be waning. In its last fiscal year, Nvidia surpassed quarterly revenue estimates by an average of 4.9%, and the prior year saw beats of 12.5%. Ivana Delevska of Spear Invest, which holds Nvidia shares, told Reuters that investor expectations for the upcoming results are relatively tempered.

The China restrictions have broader implications for Nvidia’s competitive landscape. Huang described the U.S. semiconductor curbs as “a failure,” arguing they have accelerated the development of homegrown chips by Chinese rivals like Huawei. To navigate these challenges, Nvidia is reportedly developing a new AI chipset for China based on its cutting-edge Blackwell architecture, though uncertainty around its China business has contributed to a 2.23% decline in its stock price- last trading at $134.56 – this year. This marks a stark contrast to the nearly threefold gain in 2023, when enthusiasm for AI-driven growth propelled Nvidia’s market value to record highs.

Beyond China, Nvidia is poised to capitalize on new opportunities in regions like the Middle East, where loosened U.S. export controls under a modified Biden-era AI diffusion rule could unlock growth. Notably, Nvidia has secured a deal to supply 18,000 Blackwell chips to a Saudi Arabian startup backed by the country’s sovereign wealth fund, part of broader U.S. trade agreements with Gulf nations. While analysts expect the Middle East’s revenue contribution to remain modest in the near term, these developments signal Nvidia’s ability to pivot toward emerging markets to offset losses in China.

Investor sentiment remains cautious, with concerns about rising AI infrastructure costs and the sustainability of Nvidia’s growth trajectory. Wedbush analysts emphasized that the key question for Nvidia’s earnings is whether the company can boost sales in other regions to compensate for the loss of its H20 and broader China business. D.A. Davidson analyst Gil Luria told Reuters that China remains the “biggest swing factor” this quarter, highlighting the high stakes for Nvidia as it navigates a complex geopolitical landscape amid intensifying global competition in the AI chip market.

WallStreetPit does not provide investment advice. All rights reserved.

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