Nvidia shares dipped last night as the fate of its China business hung in the balance, caught up in the trade war between Washington and Beijing.
CEO Jensen Huang expects permission to restart selling Nvidia's chips to China after striking a deal with US President Donald Trump to pay commissions to the US government.
But with no formal US rules in place and questions about whether Chinese regulators will discourage purchases of Nvidia chips, the AI market bellwether excluded potential China sales from the forecast for the current quarter.
That left only a lukewarm outlook that, while still huge in absolute dollar terms and slightly above analyst estimates, disappointed investors accustomed to blowout results and sent shares down 3.2% in after-hours trading. The stock dip clipped about $110 billion from Nvidia's $4.4 trillion market capitalisation.
"Nvidia’s biggest bottleneck isn't silicon, it's diplomacy," said Michael Ashley Schulman, chief investment officer at Running Point Capital. He added that Nvidia’s growth curve was "still impressive, but not as exponential."
The chipmaker expects revenue of $54 billion, plus or minus 2%, in the third quarter, compared with analysts' average estimate of $53.14 billion, according to data compiled by LSEG.
But its fiscal second-quarter results came up short of some analyst expectations in its important data centre segment, with some analysts suggesting cloud computing providers may be more cautious about spending.
Nvidia also said it has not assumed any shipments of its H20 chips to China in its outlook, despite having earlier this month received some licenses to sell them. If geopolitical issues subside and it gets more orders, Nvidia said it could add $2 billion to $5 billion in H20 revenue in the third quarter.
While Nvidia's forecast came in a bit softer than expectations, any sales to China next quarter would be added to the outlook, said Ben Bajarin, CEO of technology consulting firm Creative Strategies. "That is a big question mark to watch."
Still, demand has surged for Nvidia's advanced chips that can speedily process the large amounts of data used by generative AI applications as businesses race each other to dominate the new technology.
Chief financial officer Colette Kress said the company's "sovereign AI" efforts - a push to sell AI chips and software to governments around the world - are on track to generate $20 billion in revenue this year.
Kress also said AI efforts are on track to spur $600 billion in spending by cloud and enterprise customers this year alone and could generate $3 trillion to $4 trillion in infrastructure spending by the end of the decade.
Big Tech companies including Meta Platforms and Microsoft have been spending liberally to support their AI ambitions, and Nvidia is the biggest beneficiary, with a significant chunk of this spending funneled toward its chips.
The company said that about half of its $41 billion in data centre revenue came from large cloud service providers during the latest quarter.
That was slightly below estimates of $41.42 billion, according to data from Visible Alpha. Nvidia also forecast adjusted gross margins of 73.5% for the current quarter, only slightly above analyst estimates of 73.3%, according to LSEG data.
"The data centre results, while massive, showed hints that hyperscaler spending could tighten at the margins if near-term returns from AI applications remain difficult to quantify," said eMarketer analyst Jacob Bourne.
Shares of Advanced Micro Devices, which is developing AI servers to rival Nvidia's, were also down 1.4% after Nvidia's results.
Enthusiasm for AI stocks, centered around Nvidia as Wall Street engaged in picks-and-shovels trading, has been the dominating force behind the rally of the S&P 500 Index over the last two years.
"This is the smallest reaction to an earnings report in Nvidia’s AI incarnation," said Jake Behan, head of capital markets at Direxion in New York. "While it may not have been a blowout, it’s not a miss."
Nvidia had in May expected the curbs to shave off $8 billion in sales from the July quarter. The company reported revenue of $46.74 billion for the second quarter, beating estimates of $46.06 billion.
However, there does appear to be demand for Nvidia's H20 outside of China. Kress said during the analyst call that a single customer outside of China bought $650m worth of the chips during the second quarter.
Nvidia also said it had authorised an additional $60 billion in share repurchases.
We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences
Forecasting that their sales are going to be ahead of expectations without sales into China is actually "quite significant", according to science and technology journalist and host of the "For Tech's Sakes" podcast Elaine Burke.
CEO Jensen Huang expects permission to restart selling Nvidia's chips to China after striking a deal with US President Donald Trump to pay commissions to the US government.
"The deal that is apparently being worked out is that they might even be able to sell their more advanced chips, but a downgraded version of them," said Ms Burke.
"They are talking about 15% of the revenue from sales into China being shared with the US government, so that might sweeten Trump on the idea of continuing sales in China," explained Ms Burke.
"And that's why it's opened up this idea that the Blackwell chip, which is the most advanced chip that they sell, could be also sold to China, but a downgraded version," she added.
As the race between China and the US intensifies there are reports China is pushing to triple its high end chip output.
Earlier this year China's DeepSeek's breakthrough rocked stock markets, causing Nvidia's stock to plummet 17% and wiping $593 billion of the chipmaker's market value, a record one-day loss for any company on Wall Street.
"That gave a shock to the system because if you can do this cheaper with less investment in capital expenditure in building data centers in the highest grade chips available, well then what is all of this value all about really," said Ms Burke.
"Those stocks did recover from that and even in Nvidia's case in particular, although it tumbled the most in the stock shock after the DeepSeek hit, what actually happened was its stock year on year, was still phenomenally larger, it's the first company in the world to hit a $4 trillion valuation.
"Because Nvidia is the key chip maker in all of this, it's partnered with every single generative AI building company in giving these chips to them.
"And when you're talking about the number of chips, the commitment from Meta late last year was maybe somewhere in region of 30,000 chips, as of January this year it was 1.3 million chips, that's the number of Graphics Processing Units that Meta has committed to buying just from Nvidia."
Additional reporting by Gail Conway
