Nvidia's AI Boom Fueled by Cloud Giants, Hobbled by China's Clampdown

Nvidia Corp. (NVDA.O) reported a 56% year-over-year increase in revenue for the second quarter of 2025, driven by robust demand for its artificial intelligence (AI) chips from cloud providers expanding infrastructure to power generative AI technology [2]. The company forecasted third-quarter revenue of $54 billion, plus or minus 2%, exceeding Wall Street's average estimate of $53.14 billion [2]. This projection was made despite the absence of any shipments of its H20 chips to China, with the company stating there were no H20 sales to China-based customers in the second quarter [2].

Nvidia’s data center revenue reached $41 billion in the second quarter, with about half of that attributed to large cloud service providers [2]. The company has benefited significantly from the AI boom, with major tech companies like Meta Platforms (META.O) and Microsoft (MSFT.O) investing heavily in AI infrastructure, funneling a significant portion of their spending toward Nvidia’s chips [2]. This demand has been a major driver behind the S&P 500 Index’s rally over the past two years, as Wall Street has engaged in “picks-and-shovels” trading around AI stocks [2].

Despite its strong financial performance, Nvidia has been caught in the crossfire of the trade war between the United States and China. In an unprecedented deal with U.S. President Donald Trump, Nvidia agreed to pay the government 15% of some of its revenue in China in exchange for a reversal of restrictions that had curbed sales of its H20 chips to the country [2]. However, Beijing has warned domestic companies about importing these chips due to security concerns, leading to a halt in H20 chip production by Nvidia [2].

The geopolitical tensions have impacted Nvidia’s China business, which accounted for 13% of its revenue last year. For the second quarter, many analysts did not factor in any revenue from H20 sales in China due to the U.S. approval coming late in the quarter and China’s pushback complicating forecast calculations [3]. In May, Nvidia estimated the curbs would shave off $8 billion in sales from the July quarter, leading to a $4.5 billion charge in the previous three-month period [3].

Analysts suggest that Nvidia could face a 5 to 15 percentage point hit to gross margins on China-bound chips due to the federal deal [3]. The company’s adjusted gross margin is expected to drop nearly 4 percentage points to 72.1% in the second quarter and contract by nearly two points to 73.2% in the October quarter [3]. Meanwhile, local Chinese semiconductor firms, such as Cambricon, are gaining traction as alternatives to Nvidia. Cambricon reported record profits in the first half of the year, with revenue surging more than 4,000% year-on-year to 2.88 billion Chinese yuan ($402.7 million) and net profit hitting a record 1.04 billion yuan [4].

Nvidia's financial performance and market position have attracted significant investor attention, especially as the company navigates geopolitical challenges and maintains its leadership in the AI chip market. Analysts like James Schneider from Goldman Sachs have reiterated a Buy rating for Nvidia, citing its product leadership, diversified customer base, and attractive valuation relative to growth prospects [1]. As the company prepares to report its third-quarter earnings, the market is closely watching how it will handle the evolving trade dynamics and whether it can sustain its current growth trajectory.

Source: