Here’s why Nvidia’s stock is climbing despite a disappointing forecast

Nvidia's stock rallied despite a disappointing forecast impacted by U.S. export restrictions to China, with Q1 revenue at $44.06 billion, up 69% year-over-year but below estimates. The company faces $2.5 billion in lost revenue from H20 chip restrictions in Q1 and expects an additional $8 billion loss in Q2, impacting access to China's $50 billion AI accelerator market; however, strong growth in Blackwell chips and increased demand in areas like reasoning AI and AI agents are expected to partially offset these losses, with Q2 revenue projected at $45 billion plus or minus 2%.

Analysis

Nvidia Corp. demonstrated resilience in its fiscal first-quarter results, with revenue reaching $44.06 billion, a 69% year-over-year increase, despite narrowly missing Wall Street's $44.34 billion estimate and facing significant headwinds from U.S. export restrictions to China. The company incurred $4.5 billion in Q1 inventory writedowns and a $2.5 billion revenue loss due to the inability to ship its H20 chips, with an additional $8 billion revenue loss anticipated in the second quarter from these restrictions, effectively limiting access to China's $50 billion AI accelerator market. Despite this, Nvidia's stock rallied over 4% post-earnings, as its Q2 revenue guidance of $45 billion (plus or minus 2%), though below the $45.9 billion analyst consensus, implies robust underlying business strength when excluding the China impact. This optimism is fueled by strong growth in its new Blackwell chip family and emerging opportunities in reasoning AI, enterprise AI agents, and industrial AI, alongside the rescinding of the broader AI diffusion rule. The adjusted gross margin of 61%, which would have been 71.3% without the H20 writedowns, further signals healthy core profitability. Nvidia's forward price-to-earnings ratio now stands at 28.3, below its five-year average of 40, reflecting a market that is pricing in a normalization of growth from the 126% seen in fiscal 2024 and 114% in fiscal 2025 to projected rates of 53% for fiscal 2026 and 24% for fiscal 2027, indicating a shift towards more sustainable, albeit still strong, expansion.

Key Decisions for Investors

• Investors should assess Nvidia's capacity to navigate the substantial revenue impact from Chinese export controls by focusing on the strength and diversification of its growth drivers outside of China, notably the Blackwell architecture and advancements in reasoning, enterprise, and industrial AI.
• Closely monitor gross margin trends excluding one-off writedowns and the adoption rate of new AI applications, as these are key indicators of the company's ability to sustain profitability and growth momentum despite geopolitical headwinds.
• Consider the current valuation in the context of normalizing but still robust multi-year growth forecasts; while the stock appears more reasonably priced, ongoing scrutiny of export control developments and their potential future impact remains crucial.