Nvidia's Value Remains Solid, But Only Suitable for Buying on Dips

Chip giant Nvidia (NVDA) has recently announced its latest financial results, which once again exceeded market expectations. However, with potential obstacles in selling to China in the future, should its investment value be reassessed?

Nvidia recently announced its financial results for the first quarter of fiscal 2026 (ending April 27, 2025), reporting revenue of $44.06 billion, a year-on-year increase of 69%, surpassing the expected $43.3 billion. Adjusted earnings per share (EPS) stood at $0.81, up 33% year-on-year, but below the expected $0.93. Notably, Nvidia pointed out that excluding the impact of H20 chips and related tariffs, adjusted EPS would have been $0.96, exceeding the expected $0.93. This demonstrates that U.S. restrictions on chip sales to China have directly impacted Nvidia.

Nvidia CFO Colette Kress stated that although the H20 chip has been on the market for over a year, it has no demand outside of China. Moreover, the new export restrictions on H20 chips do not provide a grace period for companies to sell their inventory. Before the export ban, Nvidia had achieved $4.6 billion in H20 revenue from China, but $2.5 billion worth of inventory could not be shipped. The inventory and procurement obligations related to the ban resulted in a write-off amount of $4.5 billion. While this is lower than initially expected due to some materials being reusable, Nvidia estimates that losing the Chinese market could cost them a market value of approximately $50 billion.

The loss of the Chinese market represents more than just financial losses for Nvidia. Comments from founder and CEO Jensen Huang and other executives reflect concerns that the Chinese market could be ceded to Chinese and other competitors, which could grow stronger and potentially threaten Nvidia's leadership position. Jensen Huang warned, "China's AI competitors are evolving. Huawei is very strong, and buyers like Tencent (00700) turning to non-U.S. suppliers is understandable because they can no longer rely on American companies."

Strong Growth in Data Centers

The loss of the Chinese market seems inevitable, and although potential strong competitors may emerge in the future, there is no immediate cause for concern. In the first fiscal quarter, revenue from data centers reached $39.1 billion, a 73% year-on-year increase (see Table 1) and a 10% sequential increase, roughly meeting market expectations. Although the growth rate has slowed compared to previous quarters, it remains robust, especially considering the unexpected impact of the Chinese export ban.

Additionally, Nvidia’s stock price has been rising in recent months, primarily due to its penetration into the Middle East market facilitated by U.S. diplomacy. For example, Nvidia is collaborating with HUMAIN to build an AI plant in Saudi Arabia. It is also partnering with G42, OpenAI, and other strategic allies to construct next-generation AI infrastructure clusters (e.g., Stargate UAE) in Abu Dhabi and the UAE. Moreover, Nvidia will collaborate with Foxconn and the Taiwanese government to develop AI factory supercomputers. Beyond corporate investments, sovereign-level AI investments could emerge as another growth driver.

In the gaming sector, first-quarter revenue reached a record high of $3.8 billion, up 42% year-on-year and 48% sequentially, driven by sales supported by the Blackwell architecture. In the past, gaming was Nvidia's largest revenue source, but AI's explosive growth has significantly shifted the revenue structure.

Last quarter, Nvidia's gross margin was 60.5% (see Figure 1), a noticeable decline from recent quarters, primarily due to the impact of the China export ban. The company expects gross margins to recover to 71.8% in the second fiscal quarter, with the profitability of Blackwell products driving slight improvements quarter-over-quarter. Later this year, gross margins are projected to reach approximately 75%, supported by strong new orders that mitigate some negative impacts.

Nvidia forecasts total revenue for the current quarter at $45 billion (±2%), representing a year-on-year growth of approximately 50%, aligning with the market's expectation of 51.5%. The company anticipates slight sequential growth across all platforms. In the data center segment, sustained growth from Blackwell is expected to partially offset the decline in China-related revenues. The outlook incorporates an estimated $8 billion revenue loss from H20 chips in the second quarter.

Table 1: Nvidia’s Performance in Q1 FY2026

Source: Nvidia, Bloomberg

Nvidia's Growth Rate Continues to Slow

From Nvidia's latest earnings, its operating conditions have no major changes, and market demand for AI continues to drive growth. However, after a period of hyper-growth, the pace of expansion has slowed significantly.

According to Bloomberg, the market expects second-quarter data center revenue to reach $41.78 billion, representing a 59% year-on-year increase and a 7% sequential increase. Comparing the year-on-year growth rates of the past four quarters (Q2 FY2025 to Q1 FY2026), which were 155%, 112%, 93%, and 74%, respectively, the trend of deceleration is evident. While demand for data centers remains strong, Nvidia's high base means growth rates are expected to continue declining. Nevertheless, concerns may only arise when sequential growth turns negative in the future.

Furthermore, with the emergence of Model Context Protocols (MCP), which allow AI models to seamlessly integrate external data sources, AI agents can now perform more complex tasks, such as querying databases, organizing data, and generating charts directly for users. This marks a transition from passive response systems to proactive AI, fully entering the stage of automated commercial applications. While demand for computational power will only increase, Nvidia's rapidly improving product performance may temper the explosive growth in demand, leaving the sales impact to be observed.

From June, autonomous driving may start commercializing, and robotics next year could further benefit Nvidia.

Currently, Nvidia's price-to-earnings (P/E) ratio is 44x, with a forward P/E ratio of 29x for the next 12 months. According to Bloomberg's analyst consensus, the 12-month target price is $168.47. The strategy is more suitable for buying on dips.

Strategy: Accumulate below $114.

Disclosure: The author does not hold NVDA shares.