Nvidia reported sturdy second-quarter fiscal 2026 outcomes, however buyers did not appear overly impressed.
Synthetic intelligence (AI) chip big Nvidia (NVDA -2.78%) just lately reported sturdy second-quarter earnings for its fiscal 12 months 2026. Not solely did Nvidia beat Wall Avenue estimates, however the firm’s board of administrators additionally authorised the addition of $60 billion to its share repurchase program, which is able to assist improve earnings per share by decreasing the excellent share depend over time.
Regardless of what appeared like sturdy numbers, Nvidia’s inventory did not react too nicely and fell following the discharge. In the end, there have been each constructive and unfavourable facets from the print. Curiously, I discovered one side to be each one of the best and worst a part of Nvidia’s earnings report.
China stays a giant variable
Within the second quarter, Nvidia reported $1.05 adjusted earnings per share on $46.74 billion of income, each of which beat estimates. Nvidia additionally guided for income within the present quarter to hit $54 billion, about $900 million forward of Avenue forecasts. Nonetheless, buyers appeared barely miffed by efficiency in Nvidia’s knowledge heart enterprise. Regardless of rising 56% 12 months over 12 months, the quantity got here up barely wanting estimates.
Picture supply: Getty Pictures.
A part of the shortfall got here from a decline in gross sales of Nvidia’s H20 chips, which it sells to companies in China, in accordance with earlier authorities restrictions. The corporate has not been capable of promote its most superior chips to China over nationwide safety considerations, particularly concerning what China may attempt to construct with these AI capabilities.
These considerations have been ratcheted up below the Trump administration, which earlier this 12 months required Nvidia to acquire export licenses with a purpose to promote to China. Within the first quarter of the 12 months, Nvidia took a $5.5 billion cost because of prior built-up stock and buy commitments.
Nvidia CEO Jensen Huang seemed to be making progress with President Donald Trump, agreeing to provide 15% of the corporate’s China gross sales to the U.S. authorities if it may promote within the nation. Nvidia can also be reportedly constructing a scaled-down Blackwell chip, which is extra superior than the H20 chip, that the federal government may enable the corporate to promote in China. Nonetheless, proper earlier than earnings, media retailers reported that Nvidia had instructed its suppliers to cease making the H20 chips after the Chinese language authorities advised home corporations to keep away from Nvidia chips because of its personal safety considerations.
Administration on the corporate’s earnings name famous that if geopolitical points are solved, Nvidia may earn an extra $2 billion to $5 billion of income from H20 chip gross sales within the present quarter. However proper now, that’s not factored into the corporate’s steerage. Moreover, Huang mentioned the chance in China in 2025 would have been $50 billion “if we had been capable of tackle it with aggressive merchandise.” He continued, “And if it is $50 billion this 12 months, you’ll anticipate it to develop, say, 50% per 12 months, as the remainder of the world’s AI market is rising as nicely.”
Upside potential
The worst a part of the quarter may need been the information about Nvidia having to droop H20 chip manufacturing and seeing the Chinese language authorities inform native corporations to keep away from Nvidia’s chips. Nonetheless, there appears to be an actual chance that Nvidia will finally be capable of promote its merchandise in China, and even perhaps extra superior chips than it had been promoting.
In my view, that is additionally in a method one of the best a part of the quarter as a result of the inventory and firm are performing nicely with out income from China, which is clearly materials. Whereas the federal government has reservations about promoting U.S. chips in China, it most likely would like a U.S. firm to promote them over Chinese language corporations. The Wall Avenue Journal just lately reported that Alibaba is engaged on a chip to fill the void left by the H20 chip. Whereas Chinese language corporations do not have the identical chip capabilities as Nvidia proper now, that might change at some point.
So the chance to finally reignite a enterprise in a fast-growing market the place the chance is tens of billions in extra annual income development is probably the most thrilling a part of Nvidia’s latest quarter and near-term future prospects. Nvidia at present trades round 38 instances ahead earnings, which is above its 5 12 months common of 34.4.
That is not low-cost, particularly for such a big firm. Nonetheless, on condition that income is predicted to continue to grow at a wholesome clip and the potential upside from China, I do suppose buyers can proceed to purchase the inventory, though dollar-cost averaging is probably going one of the best technique proper now with the inventory buying and selling at a stretched valuation.
Bram Berkowitz has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Nvidia. The Motley Idiot recommends Alibaba Group. The Motley Idiot has a disclosure coverage.
