Hello Readers,

Welcome to this edition of our newsletter where we spotlight the latest developments around Nvidia's highly anticipated earnings report. We hope you find this analysis insightful and valuable.

Nvidia is set to report its quarterly earnings this Wednesday, with investors keenly awaiting clarity on the financial impact of recent U.S. export restrictions targeting China. These measures, aimed at limiting Beijing's access to advanced semiconductor technology, have raised significant concerns regarding Nvidia's exposure in the region.

Last month, the U.S. government imposed new export controls on Nvidia's H20 chip, the sole AI product previously approved for sale in China. The company has already indicated this could lead to $5.5 billion in associated charges. CEO Jensen Huang highlighted that the potential AI chip market in China could reach $50 billion in 2025, but Nvidia has forfeited approximately $15 billion in anticipated sales due to the regulatory changes.

Although Nvidia does not disclose specific sales figures for the H20, China comprised 13% of the company’s total revenue in the previous year. The critical question, according to analysts at Wedbush, is whether Nvidia can compensate for the decline in Chinese revenue with growth in other markets.

Reuters sources suggest Nvidia is preparing to release a new AI chipset for the Chinese market based on its latest Blackwell architecture. However, market uncertainty and the potential loss of Chinese business have weighed on Nvidia's stock performance, which has fallen 2% year-to-date—a sharp contrast to last year's nearly 200% surge.

D.A. Davidson analyst Gil Luria emphasized that China remains the most significant variable for Nvidia's financial outlook this quarter. Analysts expect Nvidia to post a 66.2% year-over-year revenue increase to $43.28 billion, according to LSEG data.

Susquehanna analysts estimate that the export restrictions cost Nvidia around $1 billion in sales during the last three weeks of the April quarter alone. Going forward, quarterly revenue losses could range from $3 billion to $4.5 billion, depending on evolving market conditions. Wedbush forecasts that Nvidia's adjusted gross margin may decline by over 11 percentage points to 67.7%, with potential write-downs related to the H20 causing a margin impact of up to 12.5%.

CEO Huang recently criticized the U.S. chip curbs, suggesting they have accelerated domestic semiconductor development in China, particularly by firms like Huawei. Despite these challenges, regulatory shifts could create new opportunities. The U.S. government is reportedly revising the Biden-era AI diffusion rule, which could lift restrictions in several regions while keeping China on the restricted list.

This potential easing of export controls may unlock growth opportunities in emerging markets such as the Middle East. Nvidia has already announced plans to deliver hundreds of thousands of AI chips to Saudi Arabia, including 18,000 units of its cutting-edge Blackwell chips, as part of trade agreements supported by former President Donald Trump.

While concerns about reduced AI infrastructure spending from major cloud service providers have lingered, renewed investment commitments from companies like Google have restored some investor confidence. Nevertheless, analysts caution that Nvidia's era of consistently surpassing expectations may be drawing to a close. In its most recent fiscal year, Nvidia exceeded Wall Street revenue forecasts by an average of 4.9% per quarter, down from a 12.5% average outperformance the year prior.

Ivana Delevska, CIO at Spear Invest, which holds Nvidia shares through an actively managed ETF, noted that investor expectations appear relatively subdued ahead of the results announcement.

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