Nvidia Reports Strong Earnings Despite $8 Billion Hit from U.S. China Export Controls

Nvidia recently reported financial results for the July quarter, revealing several key developments and challenges, particularly related to U.S. export controls and the burgeoning AI market. Here are the primary takeaways: China Blow Nvidia estimates that China could represent a $50 billion market, but stringent U.S. export controls are significantly hampering its potential. The company lost out on approximately $8 billion in sales in the July quarter and $2.5 billion in the April quarter due to these restrictions, specifically on its H20 chip. CEO Jensen Huang criticized the export controls, stating that they are misguided and may only push Chinese AI developers to rely on domestic chips. "The U.S. has based its policy on the assumption that China cannot make AI chips. That assumption was always questionable, and now it's clearly wrong," Huang explained. He noted that these policies are driving AI talent toward competitors like Huawei. Despite the challenges, Nvidia is exploring alternatives and considering "interesting products" that could circumvent the restrictions and enter the Chinese market. Cloud Strength Amid the geopolitical headwinds, Nvidia’s cloud business continues to be a bright spot. Cloud providers, including major players such as Microsoft Azure, Google Cloud, Oracle Cloud Infrastructure, and Amazon Web Services, account for about half of the company’s data center revenue. In the July quarter, Nvidia reported $39.1 billion in data center sales. The Blackwell line of GPUs, known for their speed and cutting-edge capabilities, made up 70% of these sales. Microsoft, a significant customer, has already deployed tens of thousands of Blackwell GPUs, processing 100 trillion tokens in the first quarter. The company will also be the first to receive the upgraded Blackwell Ultra, featuring enhanced memory and performance, with shipments starting in the current quarter. Bernstein analyst Stacy Rasgon commented positively on Nvidia's general outlook, noting the company is handling the challenging environment well despite the geopolitical issues. AI Future: Training and Inference While Nvidia's GPUs have primarily been used for training AI models—a computationally intensive process—CEO Jensen Huang is now highlighting the growing importance of inference, which involves serving trained models to end-users. The latest AI models require a substantial increase in token generation to perform reasoning tasks, a capability that enhances the quality of AI outputs. For instance, OpenAI, Microsoft, and Google are experiencing a significant leap in token generation. Huang described these new models as performing "step-by-step" problem-solving, potentially planning multiple paths to an answer, using tools, reading documents, and producing results. This shift in demand from training to inference is expected to drive further growth for Nvidia. Deutsche Bank analyst Ross Seymore believes that "NVDA's technology leadership remains strong, with growth in Blackwell shipments benefiting from exponential growth in reasoning AI and the achievement of economies of scale." Industry Insider Evaluations and Company Profile Industry analysts are largely positive about Nvidia's performance. Morgan Stanley analyst Joseph Moore stated, "NVIDIA is putting digestion fears fully to rest, showing acceleration of the business other than the China headwinds around growth drivers that seem durable. Everything should get better from here." Moore highlighted the resilience of Nvidia’s business outside of the China market and the robustness of its growth drivers. Meanwhile, Bernstein’s Stacy Rasgon added that the company’s ability to ramp up Blackwell production and meet increasing compute requirements is reassuring. Nvidia, founded in 1993 and headquartered in Santa Clara, California, is a leading technology company specialized in GPU design. Known for its innovation in AI and high-performance computing, Nvidia has been pivotal in advancing the field of machine learning and deep neural networks. The recent focus on inference and the Blackwell line of GPUs underscores the company's commitment to staying ahead in the rapidly evolving AI landscape. Despite the export controls affecting its business in China, Nvidia’s strategic diversification and technological superiority continue to position it as a dominant player in the global tech market.