The "three major headwinds" are about to test NVIDIA

Despite the market recovery, investor anxiety regarding NVIDIA has not eased.

According to a research report released by Citigroup analysts Atif Malik and Papa Sylla on Tuesday, the "three major clearing" events will test NVIDIA's stock price, including the AI diffusion rules that will take effect on May 15, the AI demand from U.S. hyperscale customers and capital expenditures, and the potential impact of tariffs on profit margins.

Citigroup also believes that investors are currently eager to digest the ongoing effects of chip export restrictions. After accounting for a $5.5 billion expense, Citigroup expects NVIDIA's upcoming first-quarter sales to be only about $500 million higher than market expectations. Even more concerning is the outlook for the second quarter, where Citigroup expects sales to remain flat quarter-over-quarter, at around $44 billion.

This stagnation expectation is a direct consequence of declining demand for H20 chips in the Asian market, as well as a broader decline in demand for Hopper architecture chips. Although the next-generation GB200 chips have begun partial shipments, and the GB300 is expected to ramp up in the fourth quarter of 2025, it seems difficult to fully offset the aforementioned negative impacts.

"Three Major Clearing" Events

AI Diffusion Rules Deadline Approaches, Increasing Uncertainty

The first "clearing event" of market concern is the AI diffusion rules that may be implemented on May 15—new restrictions by the U.S. government on AI chips and data center companies, particularly targeting so-called "second-tier" countries.

Citigroup's research warns that this may limit AI chip sales to certain "second-tier" countries and set caps on the computing power deployed by U.S. data center companies in non-U.S. and allied countries.

This undoubtedly adds new uncertainty to NVIDIA's global expansion plans.

Hyperscale Customer Demand and Capital Expenditures in Question

The second "clearing event" of investor concern relates to NVIDIA's core customers—U.S. hyperscale cloud service providers (such as Google, Amazon, Microsoft, etc.).

Reports indicate that the market urgently needs to find insights into these giants' upcoming earnings reports and comments regarding their true views on AI demand and future capital expenditure plans. This information will directly relate to the assessment of the sustainability of NVIDIA's data center business growth.

Citigroup particularly emphasizes that this is an area of high concern for investors.

Tariff Shadows Loom Over High Profit Margin Expectations

In addition to the aforementioned "clearing" events, potential tariff issues also loom like a cloud over NVIDIA's profit expectations. Previously, the market generally expected NVIDIA's first-quarter gross margin to reach the mid-range of 70%.

However, Citigroup takes a cautious stance in its model, expecting a gross margin of about 72.9%. The report clearly points out that tariffs are one of the key factors affecting profit margins. Against this backdrop, the report emphasizes that any cost increases due to tariffs could directly erode its profitability.

Despite highlighting multiple challenges, Citigroup maintains a "buy" rating on NVIDIA stock and sets a target price of $150, about 50% higher than the current stock price, citing optimism about its long-term growth opportunities in the AI sector

The target price is based on a price-to-earnings (P/E) ratio of approximately 30 times the expected earnings per share (EPS) for 2026 (C26E). However, Citigroup has also correspondingly lowered its EPS forecasts for NVIDIA for the calendar years 2025 and 2026 (CY25/26) by -1% and 0%, respectively.