Nvidia Faces Crucial Earnings with China on the Line

As Nvidia prepares to unveil its earnings on Wednesday, August 27, all eyes are set on its dealings in China amid the tumultuous backdrop of the China-US trade war. The tech giant finds itself in a precarious position due to its recent agreement with the Trump administration, which has drawn mixed reactions from both sides of the aisle.

Trade Tensions Affect Sales Prospects

Caught in the escalating trade tensions between Washington and Beijing, Nvidia's future in China is uncertain. The company has agreed to pay the U.S. government 15% of its China sales to secure vital export licenses, raising eyebrows among investors and analysts alike.

Despite the high demand for Nvidia's chips in China, the Chinese government has encouraged local firms to scale back purchases over security concerns, complicating Nvidia's market position.

Production Halts and New Chips on the Horizon

Recent reports suggest Nvidia has instructed suppliers to pause production on its specialized H20 chips destined for the Chinese market. However, in a show of resilience, the company is reportedly developing an even more advanced chip tailored for China.

Analyst Jamie Meyers from Laffer Tengler Investments notes, "We need clarity from both governments on the future of these chips and whether they will be allowed. The landscape is shifting rapidly."

China's Revenue Contribution Under Scrutiny

Last year, China contributed 13% to Nvidia’s overall revenue. However, analysts are wary, as they haven't incorporated any revenue from H20 sales for the quarter ending July 2025 due to late U.S. approvals and China's regulatory pushback.

In May, Nvidia projected that U.S. restrictions would result in an $8 billion revenue loss for the July quarter, compounded by a $4.5 billion charge in the preceding quarter.

Impressive Growth Amid Challenges

Nvidia is still projected to report a remarkable 53.2% increase in second-quarter revenue, reaching $46.02 billion, although this marks a decline from the explosive triple-digit growth seen in previous quarters.

Despite regulatory hurdles, the overall AI chip market is thriving, bolstered by major tech players like Meta and Microsoft ramping up investments.

Future Outlook: Anticipated Growth and Margin Pressures

Looking ahead to the third quarter, analysts forecast revenue to reach $52.96 billion, a 51% year-over-year increase, with $6 billion potentially stemming from China.

However, Nvidia may face significant hits to its gross margins on China-bound products due to the federal agreement, with Bernstein predicting a one-point reduction in overall margins.

An adjusted gross margin drop to 72.1% is expected for Q2, followed by a slight contraction in the upcoming quarter.

Investment Trends and Stock Performance

Despite the challenges, Nvidia's share price has surged over 33% so far in 2025, although this is a slower rate than previous years. The broader semiconductor index has also seen gains, surpassing 15%, while the S&P 500 has climbed nearly 10% year-to-date.

Positive commentary from CEO Jensen Huang could revive flagging AI stocks, alleviating investor concerns over their valuations.