Morgan Stanley's outlook on NVIDIA's earnings report: The impact of H20 is overlooked, but explosive growth in inference demand is the key
Morgan Stanley released a research report stating that although the "H20 sales restrictions" may lead to a short-term loss of $5 billion for NVIDIA, the market underestimates the long-term potential of AI inference demand. It is expected that NVIDIA's revenue for the April quarter will be $42.2 billion, lower than the official guidance of $43 billion. The H20 policy has a significant impact on revenue, resulting in a $5.5 billion inventory write-down. Despite short-term constraints, improvements in the Blackwell supply chain and growth in inference demand will drive NVIDIA's performance acceleration in the second half of the year. Morgan Stanley maintains an "Overweight" rating on NVIDIA and continues to view it as a preferred stock in the semiconductor industry
According to news from the Chasing Wind Trading Platform, Morgan Stanley released a research report on May 27, stating that although the "H20 sales restrictions" bring short-term financial pressure, potentially leading to a revenue loss of about $5 billion for NVIDIA, the market may underestimate the long-term potential of the explosive growth in AI inference demand. Coupled with improvements in Blackwell architecture supply, NVIDIA's performance in the second half of the year may see an accelerated turning point. The firm maintains an "Overweight" rating on NVIDIA and continues to list it as a preferred stock in the semiconductor industry.
The market is focusing on NVIDIA's upcoming first-quarter earnings report, which will be released after U.S. stock trading on Wednesday. This company, with a market capitalization of $3.2 trillion, is seen as a bellwether for AI demand.
Morgan Stanley expects NVIDIA's revenue for the April quarter (current quarter) to be $42.2 billion, below the official guidance of $43 billion; for the July quarter, revenue is expected to be $43.5 billion, considering a $4-5 billion reduction in H20-related revenue.
Short-term Impact of H20 Policy: Inventory Write-down and Revenue Gap
Changes in the U.S. H20 export policy have significantly impacted NVIDIA's revenue.
According to Morgan Stanley's estimates, the impact from H20 will lead to approximately a 10% quarter-over-quarter downside risk for NVIDIA's revenue in the second quarter (July 2025), and this impact has not been fully priced into market consensus. Meanwhile, this has forced the company to announce the largest inventory write-down in semiconductor industry history, amounting to $5.5 billion.
Morgan Stanley analysts estimate that this will lead to a reduction of about $1 billion in revenue for NVIDIA in the April quarter and about $5 billion in the July quarter.
Although the company is urgently lobbying the U.S. government to relax restrictions and plans to launch the L40 chip without HBM memory as an alternative, Morgan Stanley warns that there is uncertainty in the policy game.
Improvement in Blackwell Supply Chain
Despite the short-term impact of the "H20 sales restrictions," Morgan Stanley points out that the improvement in the Blackwell supply chain and the explosive inference demand are more noteworthy.
The supply constraints for Blackwell racks are improving, which was a major concern for the market previously. According to Morgan Stanley's research, the three ODM manufacturers responsible for about 90% of rack supply reached a monthly production of approximately 1,500 racks in April, and this number is expected to continue to grow throughout the year.
Analysts stated:
Our data points indicate that forecasts for annual racks have begun to be revised upward by more than 50% in recent weeks. The issues we heard from the U.S. side have been resolved, and this is starting to reflect in the numbers, which is a significant positive signal.
Morgan Stanley also believes that the market has underestimated the importance of non-rack form Blackwell chips. Many customers are not yet ready to adopt liquid cooling technology or ARM processors, so they will seek B200 or other forms of Blackwell to meet the accelerated inference demand
Explosive Growth in Inference Demand: The Real Long-Term Driver
Most importantly, Morgan Stanley believes that the explosive growth in AI inference demand is the fundamental factor determining NVIDIA's long-term value.
Morgan Stanley believes that the market is underestimating the explosive growth in AI inference demand. Major cloud providers such as Microsoft, Amazon, and Google have recently disclosed "higher-than-expected growth in Token (AI computing unit) usage," directly reflecting a surge in actual calls to AI models by end users.
Every major cloud computing company has reported stronger-than-expected Token growth.
LLM cloud customers are requesting cloud partners to increase Hopper and B200 capacity in the absence of GB200.
Analysts point out that inference demand is driven by real business needs, rather than by venture capital-supported training cluster construction, which provides key validation for the sustainability of NVIDIA's revenue.
Our confidence does not stem from these reports, but from conversations with everyone in the field who tells us they are surprised by the demand for inference and are scrambling to add GPUs.
NVIDIA's Performance Expected to Reaccelerate in the Second Half
Morgan Stanley maintains an "Overweight" rating on NVIDIA with a target price of $160, representing an upside potential of approximately 21.87% from the current stock price of $131.29. Analysts note:
Recent issues have been fully warned, and the path to reacceleration in the second half is very clear. We see a clear path for strong development in the second half.
In Morgan Stanley's view, a series of mid-term concerns that the market is worried about, including digestion periods, the transition of cloud providers supporting LLM suppliers, and the backlog behind the GB200 bottleneck, are being resolved one by one, and NVIDIA is expected to return to a strong growth trajectory in the second half.
Morgan Stanley forecasts:
NVIDIA's revenue for the April quarter is expected to be approximately $42.2 billion, below the guidance of $43 billion.
Revenue for the July quarter is expected to be approximately $43.5 billion (considering a $4-5 billion reduction in H20-related revenue), below the consensus expectation of $47 billion.
Gross margin is expected to at least meet expectations, as product mix optimization (H20 gross margin below 60%) may offset yield losses at the card level.
Revenue expectations for fiscal year 2025 are $190.8 billion, and for fiscal year 2026, $255.5 billion.
EPS expectations for fiscal year 2025 are $4.09, and for fiscal year 2026, $6.01.
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