NVIDIA Faces 10% Revenue Drop Due to H20 Restrictions, Morgan Stanley Says

Morgan Stanley has released a research report highlighting that while the "H20 sales restrictions" may cause short-term financial pressure for NVIDIA, potentially leading to a 50 billion dollar loss in revenue, the market may be underestimating the long-term potential of the explosive growth in AI inference demand. This, combined with improvements in the Blackwell architecture supply, could lead to an acceleration in NVIDIA's performance in the second half of the year. The firm maintains its "overweight" rating on NVIDIA, keeping it as the top pick in the semiconductor industry.

The market is closely watching NVIDIA's upcoming first-quarter financial report, scheduled to be released after the U.S. market closes on Wednesday. The company, valued at 320 billion dollars, is seen as a bellwether for AI demand.

Morgan Stanley expects NVIDIA's revenue for the April quarter to be 42.2 billion dollars, slightly below the official guidance of 43 billion dollars. For the July quarter, the firm anticipates revenue of 43.5 billion dollars, factoring in a 4 to 5 billion dollar reduction due to H20-related income.

The H20 policy is expected to have a significant short-term impact on NVIDIA's revenue. According to Morgan Stanley's estimates, the H20 restrictions could result in a 10% quarter-over-quarter decline in revenue for the second quarter of 2025, an impact that has not been fully priced in by the market. This has also led to the largest inventory write-down in semiconductor history, amounting to 5.5 billion dollars. The firm estimates that this could reduce NVIDIA's revenue by approximately 1 billion dollars for the April quarter and 5 billion dollars for the July quarter.

Despite efforts to lobby the U.S. government for policy relaxation and plans to introduce the L40 chip without HBM memory as an alternative, Morgan Stanley warns of uncertainties in the policy negotiations.

Despite the short-term impact of the "H20 sales restrictions," Morgan Stanley points out that improvements in the Blackwell supply chain and the explosive growth in inference demand are more critical factors to consider. The supply constraints for Blackwell racks are easing, a major concern for the market. According to Morgan Stanley's research, the three main ODM manufacturers, responsible for approximately 90% of rack supply, reached a monthly production capacity of around 1,500 racks in April, with expectations for further growth throughout the year.

Analysts note that recent data points indicate a more than 50% increase in annual rack forecasts. Issues reported from the U.S. have been resolved, and this is beginning to reflect in the numbers, signaling a major positive development.

Morgan Stanley also believes that the market underestimates the importance of Blackwell chips in non-rack forms. Many customers are not yet ready to adopt liquid cooling technology or ARM processors, leading them to seek B200 or other forms of Blackwell to meet the accelerating inference demand.

Most importantly, Morgan Stanley believes that the explosive growth in AI inference demand is the fundamental driver of NVIDIA's long-term value. The firm argues that the market is not fully aware of the rapid growth in AI inference demand. Major cloud providers like Microsoft, Amazon, and Google have recently reported "unexpectedly high" growth in Token (AI computing unit) usage, directly reflecting the surge in end-user calls for AI models.

Each of the major cloud computing companies has reported unexpectedly strong Token growth. LLM cloud customers are requesting that their cloud partners increase the capacity of Hopper and B200 in the absence of GB200. Analysts point out that inference demand is driven by real business needs, not by venture capital-backed training cluster construction, providing key validation for the sustainability of NVIDIA's revenue.

Morgan Stanley maintains its "overweight" rating and a target price of 160 dollars for NVIDIA, representing approximately a 21.87% upside from the current stock price. Analysts state that recent issues have been adequately flagged, and the path to acceleration in the second half of the year is clear. They see a clear path to strong growth in the second half of the year, with a series of mid-term concerns, including the digestion period, cloud providers supporting LLM suppliers, and the GB200 bottleneck behind the board pile-up, being addressed one by one. NVIDIA is expected to return to a strong growth trajectory in the second half of the year.

Morgan Stanley forecasts NVIDIA's revenue for the April quarter to be approximately 42.2 billion dollars, below the guidance of 43 billion dollars. For the July quarter, revenue is expected to be around 43.5 billion dollars, considering a 4 to 5 billion dollar reduction due to H20-related income, below the consensus expectation of 47 billion dollars. The firm anticipates that the gross margin will meet expectations, as product mix optimization (H20 gross margin is below 60%) may offset the loss in wafer yield. For the fiscal year 2025, revenue is expected to be 190.8 billion dollars, and for 2026, it is projected to be 255.5 billion dollars. Earnings per share (EPS) are expected to be 4.09 dollars for 2025 and 6.01 dollars for 2026.