In a surprising turn of events, Nvidia has projected a third-quarter revenue that exceeds market expectations, largely fueled by strong demand for its cutting-edge artificial intelligence (AI) chips. However, this optimistic outlook is tempered by significant uncertainty surrounding sales in China.

The AI powerhouse anticipates revenues to reach approximately $54 billion, with a margin of error of 2%. This prediction stands above Wall Street's consensus estimate of $53.14 billion.

In an unexpected twist, Nvidia has excluded any potential sales of its H20 chips to China from its forecast. This comes after the U.S. government announced a hefty 15% fee on shipments to the region, although the official guidelines for this policy remain pending.

Following the announcement, Nvidia's stocks fell 2.6% in after-hours trading, erasing around $110 billion from its staggering $4.4 trillion market valuation. This drop occurred despite the company reporting a second-quarter revenue of $46.74 billion, surpassing the anticipated $46.06 billion.

Data Centre Performance Under Scrutiny

Nvidia's data center segment contributed significantly, bringing in $41 billion, mostly from major cloud providers. However, analysts noted this figure slightly missed forecasts, indicating that hyperscale companies may be reassessing their AI spending strategies in the near term.

"While the data center results are impressive, they hint at a potential tightening of budgets if immediate benefits from AI investments remain uncertain," stated Jacob Bourne, an analyst at eMarketer.

Caught in the Crossfire of U.S.-China Tensions

Nvidia finds itself at the crossroads of rising U.S.-China tensions over AI technological dominance. In May, the company cautioned that U.S. export restrictions could potentially reduce its quarterly sales by $8 billion.

Since that warning, Nvidia has negotiated a deal with U.S. authorities to pay the 15% levy on specific sales to China to ease some restrictions, yet Beijing has encouraged local companies to steer clear of these advanced chips.

Jan Bajarin, CEO of Creative Strategies, emphasized, "Although our forecast doesn't account for China sales, any potential to tap into that market next quarter could unlock significant upside. This remains a pivotal question mark."

Despite the cloud of uncertainty hovering over its China sales, analysts still regard Nvidia as a key indicator of AI market demand and a crucial catalyst for the surge in U.S. stock markets over the past two years.