All eyes on China restrictions as Nvidia gets set to report results

Nvidia faces increased uncertainty heading into its earnings report due to new U.S. export restrictions on its H20 chip designed for the Chinese market, potentially leading to a $15 billion revenue hit; analysts expect 66% revenue growth to $43.28 billion for the quarter, a deceleration from last year's 250% growth. Despite some regulatory relief with the rescinding of the 'AI diffusion rule,' questions remain about Nvidia's China strategy and the possibility of obtaining licenses for H20, as restrictions have already cut Nvidia's GPU market share in China from 95% to 50%.

Analysis

Nvidia is approaching its upcoming earnings report amidst significant uncertainty, primarily driven by new U.S. export restrictions impacting its H20 chip, specifically designed for the Chinese market. These restrictions have led to a substantial $5.5 billion inventory writedown, characterized by analysts as the largest in chip industry history, and according to BNP Paribas, imply a potential $15 billion revenue impact from H20 sales on a rolling 12-month basis. While analysts project robust 66% revenue growth to $43.28 billion for the quarter ended in April, this represents a marked deceleration from the over 250% growth recorded a year ago. Projections for the current quarter and full fiscal year anticipate further slowing to around 53% growth. Morgan Stanley analysts indicate the impact from the H20 ban might be more severe than initially anticipated by Nvidia's management, who were reportedly surprised by the license requirement. The company's GPU market share in China has already diminished from 95% to 50% due to these restrictions, affecting a market that accounted for $17.1 billion in annual sales, including Hong Kong, ranking as Nvidia's fourth-largest. CEO Jensen Huang has cautioned that these export controls could accelerate China's development of indigenous AI processors. Although the rescission of the 'AI diffusion rule' offered some regulatory relief, the U.S. administration plans a new, simpler replacement, suggesting continued scrutiny. Consequently, Morgan Stanley anticipates that questions regarding the H20 chip and Nvidia's broader China strategy will likely persist beyond the earnings call, even as the company lobbies for export licenses.

Key Decisions for Investors

• Investors should closely scrutinize Nvidia's upcoming earnings report for detailed management commentary on the H20 chip, the quantifiable impact of U.S. export restrictions on its China business, and any revisions to forward-looking guidance.
• Given the substantial $15 billion H20 revenue hit projection and the halving of market share in China, it is prudent to assess the potential for sustained headwinds and increased competition in this significant market, which previously constituted $17.1 billion in annual sales.
• Consider the implications of a decelerating growth trajectory, with expected Q1 revenue growth at 66% versus over 250% a year prior, alongside the persistent regulatory uncertainty surrounding exports to China, which may temper near-term investor sentiment despite the stock's recent recovery.
• Monitor developments regarding Nvidia's efforts to obtain export licenses for H20 and the U.S. government's forthcoming replacement for the 'AI diffusion rule,' as these will be critical factors influencing future performance and market access in China.