Few companies have benefited more from the artificial intelligence (AI) hype cycle than Nvidia (NVDA -1.02%), as it makes billions by designing the hardware needed to run and train these advanced algorithms. However, in recent times, the company has run into challenges as Chinese competition and international trade disputes weigh on investor optimism.
Nvidia's shares are currently down by roughly 10% from an all-time high of $149 reached in January. But is this dip a buying opportunity or a signal for investors to stay far away? The company's first-quarter earnings report expected on May 28 will give us important clues about what the future might bring.
It will take a lot to impress investors
The hardest part about being a winner is that everyone expects you to keep winning. Expectations are high, and it's easy to see why. In the fiscal fourth quarter, Nvidia's revenue surged by 78% year over year to $39.3 billion, driven by strong demand for its new Blackwell graphics processing units (GPUs) designed to maximize the training speed of AI models.
New product releases are a significant growth engine because, despite their high price tags (Blackwell chips are estimated to cost between $30,000 and $40,000 per unit), customers are still willing to shell out because better hardware can help them make money by allowing them to run greater workloads more efficiently and save on energy costs.
Nvidia has leveraged its dominant market position to earn huge margins. Fourth-quarter profits surged 73% to $22.1 billion.
However, while Nvidia's past performance is excellent, this level of growth might not last forever as the company begins running into increasingly challenging comps. Nevertheless, management remains optimistic for the future, guiding for first-quarter revenue of $43 billion (plus or minus 2%), which would exceed analyst expectations of $41.8 billion and represent a jump of 62% compared to the prior-year period.
What are some of the long-term challenges?
Despite management's optimism, Nvidia is not without long-term challenges. The company's guidance was released in late February before the Trump administration unleashed its "reciprocal tariff" policy, which has created significant uncertainty in global markets. Perhaps more importantly, guidance may not account for Nvidia's challenges in China.
Image source: Getty Images.
According to CEO Jensen Huang, the Trump administration's ban on sales of its H20 chips to China could eventually cost up to $15 billion in sales. And Nvidia expects a $5.5 billion impairment charge in the first quarter to write down inventory and failed purchase commitments related to the product. With this in mind, Nvidia's first-quarter results may fall on the lower side of guidance or come in lower than expected.
Over the long term, Nvidia remains committed to the Chinese market, which Huang believes represents a $50 billion annual opportunity. According to Reuters, the company plans to release a downgraded version of its H20 in China over the next few months.
The company has also opened a research and development lab in Shanghai to stay competitive. This is a smart move as Chinese rivals such as Huawei take advantage of Nvidia's regulatory challenges to possibly chip away at its market share with AI chips of their own.
Is Nvidia a buy before May 28?
With a forward price-to-earnings multiple of 31, Nvidia goes into first-quarter earnings with a slight premium over the S&P 500 average of 24. This valuation is relatively affordable, considering the company's strong growth rate and the continued excitement about the AI industry.
That said, Nvidia faces some serious risks to the viability of its China business, and investors may want to wait until first-quarter earnings shed more light on the situation before considering a position in the stock.
