Nvidia: Data Center Growth Slowdown Is Expected To Continue Into CY2026

Nvidia's Data Center growth slowed in Q2, with this deceleration projected to persist into CY2026 due to an expected sharp slowdown in overall Data Center spending and ongoing political risks, particularly regarding China demand. Despite these headwinds, gross margin expanded in Q2, partly aided by H20 inventory release, and is forecast to approach 75% by 4Q FY2026. While the stock's valuation is not deemed overly stretched post-rally, near-term consolidation is anticipated following the 2Q FY2026 earnings.

Analysis

Nvidia's second-quarter results revealed a slowdown in its pivotal Data Center segment, a trend that is now projected to extend into calendar year 2026. This deceleration is attributed to an anticipated sharp decline in macro Data Center spending growth, compounded by significant geopolitical risks and demand uncertainty related to China. Underscoring this headwind, the company's third-quarter fiscal 2026 revenue guidance explicitly excludes potential H20 revenue from China. Despite these top-line concerns, Nvidia demonstrated strong margin performance, with gross margin expanding in the second quarter—partially aided by the release of previously reserved H20 inventory—and a forecast for margins to approach 75% by the fourth quarter of fiscal 2026. While the analyst notes that the stock's valuation does not appear overly stretched after its recent rally, the prevailing sentiment is one of caution regarding potential near-term consolidation.

Key Decisions for Investors

• Investors should closely monitor forward-looking commentary on Data Center spending and any developments regarding U.S. export controls, as the resolution of China licensing issues presents a potential catalyst for a sequential revenue rebound.
• Given the outlook for slowing growth and the analyst's caution on near-term consolidation, it may be prudent to assess risk on existing long positions rather than initiating aggressive new ones.
• Focus on gross margin execution as a key performance indicator, as its projected strength to nearly 75% provides a fundamental buffer against the expected deceleration in revenue growth.
• Despite Nvidia's position as a top AI play, acknowledge the moderately negative sentiment and increased uncertainty, which warrant a more cautious stance until there is greater clarity on the trajectory of Data Center demand and the China situation.