It’s important to put NVIDIA’s last two quarters into context. When the company reported its July quarter, it guided October revenue up 27% from the Street. Ultimately it exceeded those revenue expectations by 12%. On top of that, the company guided January revenue up 11% higher than the Street despite the China chip restrictions. It’s worth noting whisper numbers were calling for guidance to be raised by 15-20%.

Guidance would have been even higher if not for the China chip restrictions. NVIDIA’s CFO provided color on this issue, saying the impacted regions account for 20-25% of Data Center revenue and there would be a “substantial” impact in the January quarter. I translate a “substantial impact” to China revenue being down 30% from the just reported October quarter. The company’s commentary over the past month regarding the trade restrictions lead analysts to believe there would be fractional impact to the January quarter. In other words, analysts have been modeling for the China Data Center segment to be flat to up in January. Adjusting the model to reflect the CFO’s commentary of a substantial impact removes about $1B in revenue from the January quarter.

Putting it all together, if not for the China chip restrictions the company would’ve guided revenue for January 18% higher than previous expectations, which would be right in line with the whisper numbers of expectations of a 15-20% guide up.

In the end, the question is how long will these trade restrictions last and what will NVIDIA do to shift production to lower-performing chips that it can still sell to China? If the answer is this headwind will only impact CY24, then investors need not worry. If the answer is NVIDIA’s China business will forever be governed by chip restrictions, then investors should be concerned. My sense is the storm will pass and things will normalize in CY25.

For NVIDIA, all that really matters is the Data Center segment, which accounts for about 75% of revenue and will grow near 300% in the current quarter. This segment is capturing the sweet spot of AI infrastructure build-out with the company’s clear technology leadership in GPUs and high-speed networking. For the next year the NVIDIA story is simple: Keep your eyes on the Data Center segment.

While the Data Center business is growing at speeds I’ve never seen, that near-term success creates formable comps for CY24 and CY25. Those comps have lead investors to question whether the business can even grow in CY25. Jensen responded to the concern on the earnings call saying the Data Center segment “can absolutely grow through 2025.”

His optimism is based on a belief that AI will transform the lives of most people, which includes the way we communicate, learn, work, and govern. To build this future, the need for AI infrastructure will go beyond the current boost in sales NVIDIA is experiencing from companies like Microsoft, Google, Meta, and Apple. In Jensen’s view, in 2025 and beyond there will be a ramp in AI infrastructure spending from enterprise and governments wanting to build sovereign AI. Given Jensen has an outside benefit from the progression of AI, it’s prudent to view his comments through a reasonable person’s filter. Applying that dynamic, I still agree with his optimism regarding the magnitude of this shift.

The bottom line is we are just getting started in enabling AI, which will create a massive wave of demand for NVIDIA. On top of that, the company’s technologies will remain best in class for the foreseeable future, which increases the probability that it will successfully ride the wave.

As mentioned, it’s wise to be guarded about commentary from the NVIDIA management team about how big AI can be. Those spokespeople profit when shares of NVDA increase in anticipation of future revenue growth. In other words, my guard is up.

Setting aside any commentary from NVIDIA, investors should recognize that AI is for real and will have a profound impact on most of our lives over the next decade.

Some of the impacts will be negative, including the concept of “truth” becoming more illusive given the surge of deep fakes that will soon come. Another negative impact is tech addiction will increase as the methods to increase user engagement become more efficient.

Most of the impacts will be positive, including better medicines, safer cars, more fulfilling work, greater creativity, and an increase in most people’s free time.

The technologies to enable that future will be built on hardware, and today no one can touch NVIDIA when it comes to doing just that.

Disclaimer