Why Nvidia Rallied More Than 24% in May

Nvidia shares surged 24.1% in May, driven by easing US-China trade tensions, significant AI chip deals with Saudi Arabia and the UAE, and a relaxation of AI chip export restrictions. Despite a $5.5 billion inventory charge related to the ban on H20 chip sales to China, Nvidia reported strong fiscal first-quarter results, with revenue up 69% to $44.1 billion and adjusted EPS up 33% to $0.81, reassuring investors about the company's ability to navigate geopolitical risks and resolve supply chain issues, though competition from custom AI chips remains a risk.

Analysis

Nvidia's stock experienced a significant 24.1% rally in May, primarily driven by macroeconomic factors and company-specific developments rather than solely its late-month earnings report. A key catalyst was the easing of U.S.-China trade tensions in mid-May, with the U.S. reducing tariffs on Chinese goods from 145% to 30%, which spurred a broader tech stock recovery. This was compounded by the Trump administration securing substantial AI chip sales agreements with the United Arab Emirates (UAE) for 500,000 Nvidia chips starting this year, and with Saudi Arabia for a 500MW AI cluster utilizing 'several hundred thousand' Nvidia GPUs. Furthermore, the administration's decision to rescind the Biden-era 'AI diffusion rule,' which would have limited AI chip sales to certain countries, likely boosted growth expectations for these Middle Eastern markets, even as stricter barriers were imposed on sales to China, exemplified by the ban on Nvidia's H20 chip, leading to a $5.5 billion inventory charge. Despite this charge impacting profit growth, Nvidia reported robust fiscal first-quarter results with revenue surging 69% to $44.1 billion and adjusted EPS up 33% to $0.81, beating expectations and reassuring investors of its resilience. The company's stock now trades at 44 times earnings and 31 times forward earnings, reflecting a more balanced risk-reward profile as it navigates competition from custom AI chips developed by cloud giants and focuses on the launch of its new Blackwell chip.

Key Decisions for Investors

• Investors should acknowledge Nvidia's strong recent performance, fueled by favorable trade developments, significant new AI contracts in the Middle East, and robust Q1 earnings, but remain cognizant of the stock's current valuation near all-time highs, suggesting a more balanced risk-reward scenario.
• Monitor the successful launch and market adoption of Nvidia's new Blackwell chip, as this will be critical for maintaining its technological lead and justifying current growth expectations, especially in the face of potential supply chain resolutions.
• Closely track the competitive landscape, particularly the advancements and market penetration of custom AI chips by major cloud providers, which could erode Nvidia's market share and impact its growth trajectory.
• Stay informed on geopolitical developments, including U.S. export control policies concerning AI chips to China and other nations, as these regulations can significantly influence Nvidia's revenue and operational strategy, as evidenced by the H20 chip writedown.