Most know by now that Nvidia (NVDA 3.65%) missed its second-quarter earnings estimates, which had already been lowered in a preannouncement, while delivering forward revenue guidance that was nearly $1 billion below analyst estimates.

Nvidia is experiencing a sudden collapse in demand for its graphics processing units (GPUs) in its graphics segment, as video game, PC, and cryptocurrency mining demand have ground to a sudden halt.

While this is all known at the moment, and Nvidia's 50% plunge from highs reflects some of these concerns, the question for investors is where things go from here.

Looking ahead, there appears to be a big long-term green flag that could lead to a bullish rebound at some point, but another red flag that may cap Nvidia's gains -- or even lead to further declines if things don't go as planned.

Green flag: AI Transformers are more than meets the eye

While Nvidia's gaming division is in the post-pandemic doldrums, its most important segment is likely the data center market, specifically around new use cases for artificial intelligence (AI).

In each of the past few earnings calls, CEO Jensen Huang has noted the incredible importance of the recent innovation of Transformer models in AI. For reference, Transformers allow AI models to learn skills without the need for human-labeled data. In other words, the Transformer models allow AIs to "learn" for themselves, which is leading to increased use cases and breakthroughs across a host of different industries. "The importance of this new model, Transformers, can't possibly... be overstated," Huang said on the Q2 conference call with analysts.

Although gaming plunged 44% last quarter, data center revenue managed a 61% year-over-year gain and a 1% quarter-over-quarter gain. But the muted quarterly gain was due to supply constraints for other non-GPU parts, such as networking devices, showing that data center demand is still healthy. "We're seeing a great deal of demand for GPUs in the cloud," Huang said.

This argument for resilient data center demand in the face of a weakening or uncertain macroeconomic environment does seem to hold water. When money is tight, more companies may plug into the cloud, as opposed to building their own data centers. Furthermore, AI helps to boost company efficiency and competitiveness.

For example, even though Facebook and Instagram parent Meta Platforms (META 2.98%) is struggling right now on the revenue side and may be cutting some staff, it still wants to quintuple the amount of GPUs in its data centers this year for its deep recommender engine in order to combat Tik Tok.

Furthermore, cloud investment in China ground to a halt in the second quarter amid widespread lockdowns; however, that is unlikely to stay that way as the country reopens and stimulus measures begin to take hold.

Nvidia's new AI chip, Hopper, is also set to be released at the end of this year, which could reaccelerate data center growth. Hopper is designed specifically for Transformer models, which are leading to breakthroughs that, Huang said, "I don't think anybody could have predicted."

Given the rapid growth of AI applications, especially in the cloud, as evidenced by Meta's announcement, recent earnings from all of the large cloud infrastructure hyperscalers, as well cloud data platform Snowflake, it seems likely Nvidia's data center segment has years of growth ahead of it, no matter what the consumer side of the equation is doing.

Red flag: Interest rates and valuation

Although the data center segment seems poised for growth, the gaming headwinds could last for some time, just given the fading of pandemic headwinds as well as lower consumer spending likely in the year ahead.

On Friday, Fed Chairman Jay Powell said that bringing inflation back down would take "some time" and involve "some pain." That means the Federal Reserve would likely continue raising interest rates until the Fed has achieved its 2% target. Some leading economists think the Federal Funds rate will need to go much higher in order to tame inflation, even though there has been significant increases already.

While Nvidia's stock has been bid down this year, down 48.3% from all-time highs, it still trades at 44 times earnings. That multiple is certainly high, especially for the cyclical semiconductor sector. While Nvidia should still generate above-sector growth over the long-term, as this quarter's results and guidance showed, its non-data center businesses in gaming and professional visualization are still quite cyclical. Since Nvidia's peers trade at more market-level multiples (or below) due to their cyclicality, it's curious that Nvidia's multiple has made such a gap over its peers.

So while there may not be anything particularly wrong with Nvidia's business -- quite the contrary, actually -- rising interest rates and a potential recession next year could make upside difficult. Furthermore, if on the off-hand chance either Advanced Micro Devices (AMD 2.44%) or even Intel (INTC -0.38%), which is beginning to make its own GPUs, makes competitive inroads, Nvidia's sky-high multiple could cause a fall in the stock, since there isn't much margin of safety there.

For the record, I don't see Nvidia losing its lead in high-end GPUs anytime soon, it's just with a multiple that much ahead of its semiconductor peers, and with interest rates likely to stay higher than they have been for the last 10 years -- when Nvidia's stock took off --its valuation remains a red flag in this environment.

If Nvidia's "green flag" in the data center has more growth upside to compensate for the "red flag" of the high multiple, the stock may bottom here; however, investors should note that there isn't the biggest margin of safety in this much-loved stock, and we are headed into a very uncertain environment in terms of both interest rates and economic activity.