- Earnings beat expectations but investors have plenty of worry points
- Scale of quarterly revenue beat has declined for third time in a row
- The potential reopening of China for H20 chip sales isn’t playing out as expected as CEO Jensen Huang continues to call for full access to the country – but the Trump administration isn’t playing ball
- Nvidia reveals product line that could be ‘next multibillion dollar’ area
- Robotics also seen as major growth opportunity
Dan Coatsworth, investment analyst at AJ Bell, comments:
“AI demand is not the problem for Nvidia, it’s more how politics has got in the way of its grand ambitions for global domination.
“The company is stuck between a rock and a hard place. Nvidia has technology that countless companies are queuing up to buy, yet the US trade war has made it difficult to sell whatever it wants into China.
“The Trump administration recently gave the impression it was prepared to have more rational conversations with China. Importantly, it agreed to relax some export controls on certain technology.
“Part of that deal was allowing Nvidia to restart shipments of its H20 chip to China in exchange for paying 15% of those sales to the US government. Comments on Nvidia’s latest earnings conference call reveal that such sales have yet to restart. Furthermore, the chip giant has not included any H20 sales to China in its forward earnings guidance, leaving investors shocked and the share price down in pre-market trading. Also contributing to share price weakness was investor disappointment around data centre figures.
“Nvidia seems to be shaking its head in frustration as its hands are tied with regards to the China situation. Chief executive Jensen Huang says China would be a $50 billion opportunity for Nvidia this year, with the potential for 50% annual growth if it were able to sell what it wants. But rules and regulations mean it cannot fully exploit this opportunity.
“First, the US government didn’t want China to get its hands on the most advanced US technology for security reasons. Now, Nvidia is allowed once again to sell what Trump calls ‘old’ technology to China, but the US government hasn’t actually signed off on the new revenue-sharing structure, according to the tech firm.
Wider risks to Nvidia from China issues
“Ultimately, Nvidia wants to do business around the world, particularly in China as it is the second largest computing market in the world, and a magnet for AI researchers. It is desperate to sell its advanced Bramwell chip to that part of Asia but the Trump administration is having none of it. To Nvidia, this is a lost opportunity both strategically and in terms of revenue generation.
“The longer Nvidia is effectively blocked from China for its top tech, the greater the chance that the Asian country will find alternatives, and that’s likely to come from investing more in R&D in domestic sources and developing challenger products to what’s already available in the US.
“There are reports that China was angered by comments from US commerce secretary Howard Lutnick that implied America was only offering technology scraps to the Asian country, but enough to get them addicted. In retaliation, there is talk that China is now encouraging its leading technology companies to stop buying the Nvidia chips and use domestic technology instead.
“This is a political spat that underlines the ongoing tensions between the US and China, and one which could have major ramifications for Nvidia and the global tech space. In a worst-case scenario for Nvidia, this could lead to a big drop in sales not only to China, but potentially in other parts of the world if the Asian superpower pursues commercial opportunities by selling its tech to other countries.
“For now, not including any H20 sales into forward earnings guidance is a sensible thing to do. In a best-case scenario, Nvidia secures Chinese sales and that would give a nice boost to earnings. Worst-case scenario is no H20 China sales and that situation is now already baked into guidance, so Nvidia would avoid any negative surprise to the market if this happened.
Nvidia’s next big thing?
“The company is never one to sit on its hands and wait for problems to be resolved. Nvidia is always working on the next big thing and there are plenty of spinning plates in its empire.
“It says the RTX Pro servers could become a multibillion dollar product line. These deliver AI and visual computing capabilities to accelerate data centre workloads. Effectively, this is Nvidia helping to put more power into the hands of its customers so they can do things faster, process more information, and have greater capacity to do tasks.
“Disney is using the servers to help bring its stories to life in more detail at various theme parks. Eli Lilly is deploying the technology to enhance its drug discovery capabilities, while Hyundai has embraced the servers as part of a test to reduce new factory construction time and for autonomous driving verification. These are big names validating Nvidia’s expertise and proving that the chip company is a go-to name to support technological innovation.
Robotics plan
“Physical AI is also on the menu. Nvidia has launched a robot brain as it targets the robotics sector as another potentially lucrative source of revenue. Whereas generative AI is already replacing certain roles such as call centre agents, robots are taking over factories and Nvidia clearly wants a slice of the pie.
“Fundamentally, Nvidia’s margins remain very high and it is making massive profits. Optimists have plenty to get excited about. However, the list of worry points is growing and cannot be ignored.
“The big unknown is the pace of earnings growth as there are growing concerns that the flood of money going into AI is unsustainable. Layer on the fact that politics is getting in the way and the scale of its revenue beat continues to get smaller – it has declined for three straight quarters – and you can understand why certain investors are getting a bit edgy.”