Key points
- Nvidia’s Q2 earnings announcement will focus heavily on its China operations.
- A controversial deal with the US government and subsequent Chinese pushback complicate the situation.
- China accounted for 13% of Nvidia’s revenue last year. Still, sales are expected to be significantly lower this quarter due to trade tensions.
- Analysts predict strong overall revenue growth driven by booming AI demand from tech giants, despite China’s challenges.
Nvidia’s upcoming second-quarter earnings report, scheduled for Wednesday, will be closely scrutinized by investors, particularly concerning the company’s performance in the Chinese market. The AI chipmaker’s business in China has become a focal point amidst the ongoing US-China trade war.
A recent agreement with the US government, requiring Nvidia to pay 15% of its Chinese sales to the federal government in exchange for export licenses, has drawn criticism from both sides of the political spectrum. This, coupled with Beijing’s efforts to curb imports of Nvidia’s chips due to perceived security concerns, creates a complex and uncertain environment for the company.
Adding to the uncertainty, reports suggest Nvidia has halted production of its specialized H20 chips for the Chinese market. However, the company is reportedly developing a more powerful replacement. This situation leaves analysts grappling with forecasting challenges, as the impact of both the US agreement and China’s response remains unclear.
Many analysts did not include any revenue from H20 sales in their Q2 projections due to the late timing of the US approval and the subsequent Chinese actions.
Despite these challenges in the Chinese market, Nvidia is projected to report substantial overall revenue growth in the second quarter. Analysts anticipate a 53.2% increase, reaching $46.02 billion, primarily fueled by soaring demand for AI chips from major tech companies like Meta and Microsoft.
However, this represents a slowdown from the triple-digit growth seen in previous quarters. While CEO Jensen Huang’s comments on the overall demand could potentially boost AI stocks, which have recently experienced a sell-off, investors are likely to remain cautious given the geopolitical headwinds.
Looking ahead to the third quarter, analysts project revenue of $52.96 billion, with an estimated $6 billion potentially coming from China. However, the deal with the US government is expected to impact Nvidia’s gross margins, with estimates ranging from a 5% to 15% reduction on China-bound chips.
This translates to a projected nearly 4% drop in adjusted gross margin for the second quarter and a further decrease in the third. The overall situation highlights the significant geopolitical risks facing technology companies operating in the increasingly complex global landscape.
