Nvidia Stock Drops After Earnings. 3 Reasons Not to Panic About the AI Trade.

Nvidia CEO Jensen Huang has built the company into the favored provider of chips for artificial-intelligence training. (Photo by PATRICK T. FALLON/AFP via Getty Images)

Nvidia isn’t infallible after all. The chip maker was falling after an earnings report that couldn’t satisfy sky-high expectations but there’s no reason to assume the artificial-intelligence trade is finished.

Nvidia stock was down 2.0% at $177.95 in premarket trading.

While Nvidia’s July-quarter earnings and outlook beat expectations, the slim margin of outperformance wasn’t enough to satisfy the market, while it actually missed consensus forecasts for its all-important data-center segment.

But taking a step back, there are reasons to be optimistic. Firstly, a 56% rise in revenue from the prior year was remarkable for such a large company, even if it was the slowest growth rate that Nvidia has reported in more than two years.

“There were some worries/jitters given the crowded positioning and with the stock trading at $180+—but overall fundamentals haven’t really changed, and don’t think a <$1bn miss on high expectations really changes people’s views and thinking on Nvidia,” wrote Jefferies analyst Blayne Curtis in a research note.

Curtis has a Buy rating and $200 target price on Nvidia stock.

Secondly, there was one obvious factor holding Nvidia back, which was the fact it didn’t sell any new H20 chips for the Chinese market in the July quarter. The company is assuming no revenue from the processors in the third fiscal quarter either, despite getting U.S. government permission to sell the hardware.

Nvidia has asked some partners to stop work related to production of its H20 processor after the Chinese government told domestic companies not to buy the hardware, The Wall Street Journal has reported, citing people familiar with the matter.

If Nvidia could resume H20 sales, then Chinese revenue would be worth between $2 billion and $5 billion in sales in the third quarter, according to the company’s executives. The future opportunities could be even bigger—Nvidia CEO Jensen Huang noted China represents a $50 billion market for AI infrastructure, growing at 50% a year, and said there was a “real possibility” it would be able to sell its more advanced Blackwell chips there in future.

“The company is still growing over 50% on their guidance at a $50B quarterly revenue run rate—that’s remarkable, even for the current valuation,” said David Wagner, head of equity at Aptus Capital Advisors, which holds shares in Nvidia. “I actually thought the best part of the report was the gross margin guidance of 73.5% showing resilience in profitability, even without any China H20 revenue.”

Finally, the bigger picture for Nvidia is whether there’s any sign that investment in AI technology from major companies such as Microsoft , Amazon.com and Google-parent Alphabet is slowing. Huang doesn’t think so—he told analysts that the largest AI companies will spend $3 trillion to $4 trillion over the next five years.

So long as Nvidia can ensure its chips remain indispensable for powering AI, then this quarter should just be a blip on its record.

Write to Adam Clark at adam.clark@barrons.com