MW Here's why Nvidia's stock is climbing despite a disappointing forecast
8:42 PM ET 5/28/25 | MarketWatch
By Laila Maidan
Investors are embracing a 'keep calm and carry on' attitude as Nvidia shows a healthy business outside of China, with big growth opportunities ahead
"Keep calm and carry on" was the mood around Nvidia Corp.'s stock as the company reported earnings and explained the impact of export restrictions on its business. The stock rallied by more than 4% in after-hours trading on Wednesday.
Nvidia's fiscal first-quarter results included revenue of $44.06 billion, up by 69% from a year earlier, and above Wall Street's estimates for $44.34 billion, based on FactSet data.
Top of mind for analysts, heading into the report, was how Nvidia (NVDA) would address the U.S. government's latest export restrictions on its H20 product, which had already been modified to meet earlier rules on technology sales to China. On the call, Chief Executive Jensen Huang admitted that, as of yet, there was no solution that would allow the company to continue exporting the chips. Nvidia also isn't able to make further adjustments to its Hopper product line to meet the newest restrictions.
Nvidia conducted $4.5 billion in inventory writedowns for its first quarter as a result of the export controls. Additionally, it noted $2.5 billion in revenue loss from an inability to ship out its H20 chips in the first quarter. Nvidia is expecting an additional $8 billion in revenue losses for the second quarter. Going forward, the company cited that the biggest issue would be the lack of access to China's $50 billion market for article intelligence accelerators.
Despite that, Nvidia expects fiscal second-quarter revenue to come in at $45 billion, plus or minus 2%, Analysts were expecting $45.9 billion. But the outlook isn't bad considering the expected $8 billion in lost revenue for the period.
On the call, Melius Research analyst Ben Reitzes noted that the revenue guidance implies the company is doing better than expected when excluding the revenue losses from China. Chief Financial Officer Colette Kress pointed to growth in Blackwell, the company's latest chip family, as the source of the company's revenue strength.
Huang added that there were four positive surprises helping cushion the China revenue blow. They included an increase in chip demand due to the development of reasoning AI, which are models that can problem solve and reach conclusions; the rescinding of the AI diffusion rule, which was intended to be a wider set of export controls impacting sales of AI chips to countries other than China; the growing demand for AI agents that can understand and complete tasks at an enterprise level; and industrial AI or AI factories. Huang believes AI will be a part of every factory globally as new plants are currently being built.
It's not the kind of beat that investors have been used to, but the numbers weren't bad given the issues Nvidia was navigating, said Thomas Martin, senior portfolio manager at Globalt Investments. Key to the numbers was Nvidia's adjusted gross margin, which came in at 61%. However, without the writedown from the H20 chips, the adjusted gross margin would have been 71.3%, in line with what analysts were looking for. It's a sign that the business remains healthy, despite the setbacks in China.
In terms of how the stock is valued: Nvidia has a forward price-to-earnings ratio of 28.3, with the metric measuring how much an investor pays for every dollar the company earns. That's below its five-year average of 40, according to data compiled from FactSet. The ratio is compressing as investors look ahead to slowed growth, but it's not a negative to the company's outlook. Nvidia is coming off of a huge pop in revenue growth. The company saw 126% growth in fiscal 2024 and 114% growth in fiscal 2025. For fiscal 2026 and fiscal 2027, analysts expect growth rates of 53% and 24%, respectively.
In short, the stock is more reasonably priced. Nvidia is just dwindling down to a normalized growth rate, one that it can sustain, added Martin, even though he's not sure where that growth will settle. For now, he said, investors are just willing to pay for upside surprises and the future potential of AI development.
-Laila Maidan
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