Chipmaker Nvidia set a fresh sales record in the second quarter, surpassing Wall Street expectations for its artificial intelligence chips. But shares of the chip giant still dropped 2.3% in after hours trading, in a sign that investors’ worries of an AI bubble and the repercussions of Donald Trump’s trade wars are not quelled.
Nvidia’s financial report was the first test of investor appetite since last week’s mass AI-stock selloff, when several tech stocks saw shares tumble last week amid growing questions over whether AI-driven companies are being overvalued.
On Wednesday, Nvidia reported an adjusted earnings per share of $1.08 on $46.74bn in revenue, surpassing Wall Street’s projection of $1.01 in earnings per share on $46.05bn in revenue, according to Fact Set data.
But investors had high expectations for the company. Some of the market reactions may be to the slight misses in other parts of the company’s business, including data center revenue. Nvidia posted $41.1bn in data center revenue, missing the $41.3bn Wall Street was expecting.
“Coming off a new rally to all-time highs, being merely on the mark in terms of revenue simply wouldn’t cut it for Nvidia this time around,” said Thomas Monteiro, senior analyst at Investing.com. “Saying the stock was priced for perfection would be an enormous understatement, as it was, in fact, in need of another massive beat.”
The company also said it had not assumed any shipments of its H20 chips to China in the outlook.
The chip is at the heart of concerns over the repercussions of the trade war between the US and China. Earlier this year, Trump banned AI chip sales in China, a move that resulted in a $4.5bn blow to Nvidia’s finances during its fiscal first quarter. In August, Nvidia agreed to give the US government a 15% cut of its H20 chips to China in return for export licences. China, in turn, has voiced security concerns over the chips, and is ramping up production of its own domestic alternatives.
Nvidia’s chief financial officer, Colette Kress, said on the earnings call that some companies have expressed interest in purchasing H20 and an initial set of companies have received licenses to purchase the chip. Kress said that the company could ship anywhere between $2bn and $5bn of H20 chips to China if “geopolitical issues reside”.
Huang reiterated the importance of being able to operate in the China market, which he said could represent a $50bn market opportunity for the company this year. “We’re talking to the administration about the importance of American companies being able to address the Chinese market,” Huang said. He also said in addition to H20 being approved for sales in China to non-sanctioned companies, there is a potential opportunity for the company to eventually sell a version of Blackwell in the country.
“It is the second largest computing market in the world, and it is also the home of AI researchers – about 50% of the world’s AI researchers are in China,” Huang said. “The vast majority of leading open source models are created in China. It’s fairly important for the American technology companies to be able to address that market.”
Monteiro, the Investing.com analyst, said: “The reality is that without the much-needed push from H20 sales in China, Nvidia simply cannot sustain the type of growth priced into its valuation.”
The company is projecting $54bn in revenue in the third quarter – which is within the range of Wall Street expectations – and said the board approved $60bn in additional stock buybacks – on top of nearly $24.3bn the company returned to shareholders in the first half of the year in both stock buybacks and cash dividends.
Founder and chief executive, Jensen Huang, said production of the company’s latest AI superchip, Blackwell, is “ramping at full speed, and demand is extraordinary.
“The AI race is on, and Blackwell is the platform at its center,” Huang said in a press release.
Despite the initial tepid market reaction to the company’s financials, some analysts remain bullish on the so-called AI revolution, especially as major technology companies like Meta, Microsoft, Amazon and Alphabet are investing heavily in AI infrastructure. “This is further validation for Nvidia and the AI Revolution,” said the Wedbush Securities analyst, Dan Ives.
“This is a very important print and guide for the broader tech world and it shows the AI Revolution is heading into its next gear of growth despite the current headwinds with China. There is one chip in the world fueling the AI Revolution and its Nvidia … that narrative is clear from these results and the positive commentary from Jensen,” Ives said.
