Nvidia's stock dropped by 3% in extended trading despite reporting strong second-quarter earnings. The stock declined to $181.60 in after-hours trade, wiping out nearly $110 billion in market value. This seemingly counterintuitive reaction was driven by concerns over the company's China sales outlook and a general "sell-the-news" sentiment among investors.
Q2 2025 Financial Highlights
Nvidia reported a stellar second quarter for fiscal year 2026, which ended on July 27, 2025. The company's revenue surged 56% year-over-year to $46.7 billion, surpassing Wall Street's consensus estimate of $46.2 billion. Earnings per share (EPS) also came in strong at $1.05 per share, beating the forecast of $1.01.
- Data Center Revenue: This key segment, the engine of Nvidia's growth, posted revenue of $41.1 billion, representing a 56% year-over-year increase. While this was a massive number, it fell slightly short of analyst "whisper" expectations of $41.3 billion.
- Gaming and Other Segments: The Gaming platform also performed well, generating $4.3 billion in revenue and beating estimates. The Automotive and Professional Visualization segments also showed strong growth, but they remain small contributors to the overall revenue.
- Shareholder Returns: The company's board also authorized a new $60 billion stock buyback program, in addition to the $14.7 billion remaining from the previous plan, signaling a continued commitment to returning value to shareholders.
The China Outlook: The Core Concern
The primary reason for the stock's negative reaction was the uncertainty surrounding Nvidia's business in China. The company disclosed a $4 billion decline in sales of its H20 processors—chips specifically designed for the Chinese market—due to escalating US-China trade tensions and export controls.
Nvidia's management, including CEO Jensen Huang, has been in discussions with the U.S. government to resume shipments. While there's a possibility of resuming sales with a condition of paying commissions to Washington, the company's Q3 guidance does not assume any contribution from H20 sales. This lack of clarity and the potential for a significant revenue hit from a crucial market segment spooked investors.
"Sell the News" Phenomenon
The stock's drop can also be attributed to a classic "sell the news" reaction. Leading up to the earnings report, Nvidia's stock had been on a tremendous run, gaining over 30% in the last year. The company's valuation was already at a sky-high level, with many analysts and investors considering it to be overvalued.
With expectations so high, even a stellar report that didn't show a significant positive surprise in every single metric, such as the slight miss in data center revenue, was enough for traders to lock in profits. The market's reaction suggests that while the AI narrative is still strong, the era of hyper-exuberant, triple-digit growth may be slowing, leading investors to become more selective.
Q3 2025 Guidance and Future Outlook
Despite the stock drop, Nvidia's guidance for the third quarter of fiscal 2026 was robust. The company expects revenue of $54 billion, plus or minus 2%, which is ahead of Wall Street's average forecast of $53.14 billion. This outlook remains impressive, especially since it excludes potential China H20 sales. The company's continued focus on its new Blackwell and GB300 platforms, which are now in full production, is expected to drive future growth. Management stated that the company sees a potential for $3 to $4 trillion in AI infrastructure spend by the end of the decade, reaffirming its long-term bullish outlook.
In my opinion, the stock's modest decline is likely due to short-term traders and will be recovered shortly.
0 Comments