Nvidia (NASDAQ:) is expected to report earnings next week. Although we expect a messy guide, the expectations for Nvidia’s earnings are very low (much lower than consensus indicates).
During the quarter, there was a big announcement about the US restricting exports of H20’s to China. As a result, Nvidia wrote off $5B of inventory, resulting in a margin hit of about ~15% (we expect GMs to drop from the low 70s to high 50% in the current quarter.)
At face value, $5B of inventory would be ~$15B of revenue impact for the full year and ~$5B in 2Q-4Q per quarter, which is now in buy-side expectations. This is in-line with what Jensen highlighted at Computex. However, we found it interesting that Nvidia did not mention the revenue impact in the press release, implying that there could be significant offsets.
To summarize, we expect a beat in F1Q26, a messy F2Q26 guide, and a very strong F2H26. Consequently, all eyes will be on commentary related to the Blackwell ramp, which we expect will more than offset the negative impact of China.
Here is why a messy guide won’t matter:
Investors have abandoned the AI trade, and with a positive 2H outlook (see below), they will have to come back and chase the high-quality AI stocks.
Export Restrictions and Potential Regulatory Upside
While export restrictions to China weighed on Nvidia’s stock and most analysts took their expectations down for both margins and revenues, a more interesting development that didn’t get as much attention was the US BIS rescinding the AI Diffusion rule, which was introduced in January of this year and was expected to take effect on May 15th, 25.
For background, the Diffusion rule aimed to limit the global spread of advanced artificial intelligence capabilities. It’s goal was to restrict the export of certain high-performance chips—not just to China, but to other countries as well. The rule was designed to prevent the proliferation of U.S.-origin technology that could be used in military or surveillance applications. But its broad scope could unintentionally weaken the global competitiveness of U.S. chipmakers like NVIDIA by restricting access to key international markets and undermining the advantages of proprietary platforms like Nvidia’s CUDA.
In fact, with all the export restrictions to China (introduced under both administrations), Nvidia didn’t complain a single time but continued to modify its products to fit updated regulations. However, when it came to the AI Diffusion rule, the company issued a public statement.
This indicates to us that the positive impact of canceling the diffusion rule will outweigh the negative impact of the China restrictions, which is already in consensus numbers.
We highlighted the potential of cancellation back in April, when the US introduced the incremental China regulations.
All Eyes Are on 2H25
Here is why:
- Grace Blackwell is in full production – Nvidia’s CEO, Jensen Huang, was much more confident in the rollout at Computex and highlighted very strong demand.
- The transition to the next-gen Blackwell Ultra GB300 systems will be significantly easier, given the similarity in structure and infrastructure requirements.
- Sovereign build-out: Last week’s Middle-East deals could benefit 2H enough and offset the China drag. Benefits will extend for 5 years with more pronounced impact in ’26 and beyond.
The bottom line is that the incremental news for Nvidia has been positive: Cloud Giants’ capex surprised to the upside, Deep Seek was a non-event, the Dffusion rule got canceled, and Blackwell is ramping nicely, but the stock has gone nowhere, which could imply significant upside once sentiment turns.
In summary, institutional investors, both hedge funds and long-onlys, reduced exposure to the AI trade and will now have to chase it regardless of 2Q earnings, as fundamentals are expected to step up in the second half of this year.