Nvidia reports earnings tomorrow. Here's the main issue on investors' minds.

Nvidia is set to release fiscal first-quarter earnings amid investor focus on the impact of U.S.-China trade restrictions; analysts estimate revenue of $43.3 billion and adjusted earnings of 73 cents a share, with data-center revenue expected to grow 74%. Restrictions banning sales of H20 chips to China are expected to result in $5.5 billion in charges for the quarter, and while Nvidia is developing a less powerful chip for the Chinese market, analysts anticipate a hit to gross margins and are closely watching for guidance on Blackwell platform performance and a potential recovery in China sales later in the year.

Analysis

Nvidia is poised to report its fiscal first-quarter earnings, with investor attention acutely focused on the ramifications of U.S.-China trade restrictions on its significant data-center business. Analysts anticipate revenue of $43.3 billion and adjusted earnings of 73 cents per share for the April quarter, with data-center revenue projected at $39.4 billion, representing a 74% year-over-year increase, albeit a deceleration from the 93% growth observed in the January quarter. A critical factor will be the impact of the U.S. government's ban on sales of Nvidia's H20 chips to Chinese customers, which is expected to result in $5.5 billion in charges for the quarter and has been described by CEO Jensen Huang as "deeply painful," costing an estimated $15 billion in sales. This ban is also projected by Bank of America analyst Vivek Arya to depress gross margins to approximately 58%, a significant drop from the previously guided 71%. Despite these headwinds, and Jefferies analysts not expecting upside to current quarter results or guidance, there is an underlying optimism. Nvidia is reportedly developing a less powerful, Blackwell-based chip for the Chinese market, potentially starting mass production next month, which could aid in sales recovery. Furthermore, analysts highlight the "insatiable" demand for Nvidia's new Blackwell AI platform, expected to significantly ramp in the second half of the year and potentially restore gross margins to the mid-70% range. Supply chain checks by Jefferies suggest earlier constraints may be easing, with numbers for the GB200 product possibly being underestimated, indicating building momentum. While Jefferies has lowered its July and October quarter revenue estimates to $45.3 billion and $51.1 billion respectively, the upcoming earnings are viewed by some, like Cantor Fitzgerald's C.J. Muse, as a "clearing event" to emphasize this Blackwell-driven momentum. Nvidia's stock, after a recent pullback, showed premarket gains, reflecting the market's anticipation of these offsetting factors.

Key Decisions for Investors

• Investors should closely scrutinize Nvidia's upcoming earnings report and forward guidance, particularly concerning the quantifiable impact of China sales restrictions and the projected timeline for gross margin recovery.
• Attention should be directed towards management's commentary on the Blackwell platform's adoption rate, its contribution to second-half growth, and specific strategies for mitigating China market losses, including details on new compliant product introductions.
• Given the significant headwinds from U.S. export controls juxtaposed with strong underlying AI demand and the Blackwell transition, investors should assess whether current valuations adequately price in both the near-term challenges and the long-term growth catalysts, carefully monitoring for signs of Blackwell's ramp offsetting current pressures.