Artificial intelligence (AI) chip giant Nvidia (NVDA -2.78%) recently reported strong second-quarter earnings for its fiscal year 2026. Not only did Nvidia beat Wall Street estimates, but the company’s board of directors also approved the addition of $60 billion to its share repurchase program, which will help increase earnings per share by lowering the outstanding share count over time.

Despite what looked like strong numbers, Nvidia’s stock didn’t react too well and fell following the release. Ultimately, there were both positive and negative aspects from the print. Interestingly, I found one aspect to be both the best and worst part of Nvidia’s earnings report.

China remains a big variable

In the second quarter, Nvidia reported $1.05 adjusted earnings per share on $46.74 billion of revenue, both of which beat estimates. Nvidia also guided for revenue in the current quarter to hit $54 billion, about $900 million ahead of Street forecasts. However, investors seemed slightly miffed by performance in Nvidia’s data center business. Despite growing 56% year over year, the number came up slightly short of estimates.

Image source: Getty Images.

Part of the shortfall came from a decline in sales of Nvidia’s H20 chips, which it sells to businesses in China, in accordance with previous government restrictions. The company has not been able to sell its most advanced chips to China over national security concerns, specifically regarding what China might try to build with these AI capabilities.

These concerns have been ratcheted up under the Trump administration, which earlier this year required Nvidia to obtain export licenses in order to sell to China. In the first quarter of the year, Nvidia took a $5.5 billion charge due to prior built-up inventory and purchase commitments.

Nvidia CEO Jensen Huang appeared to be making progress with President Donald Trump, agreeing to give 15% of the company’s China sales to the U.S. government if it could sell in the country. Nvidia is also reportedly building a scaled-down Blackwell chip, which is more advanced than the H20 chip, that the government might allow the company to sell in China. However, right before earnings, media outlets reported that Nvidia had instructed its suppliers to stop making the H20 chips after the Chinese government told domestic companies to avoid Nvidia chips due to its own security concerns.

Management on the company’s earnings call noted that if geopolitical issues are solved, Nvidia could earn an additional $2 billion to $5 billion of revenue from H20 chip sales in the current quarter. But right now, that is not factored into the company’s guidance. Furthermore, Huang said the opportunity in China in 2025 would have been $50 billion “if we were able to address it with competitive products.” He continued, “And if it’s $50 billion this year, you would expect it to grow, say, 50% per year, as the rest of the world’s AI market is growing as well.”

Upside potential

The worst part of the quarter might have been the news about Nvidia having to suspend H20 chip production and seeing the Chinese government tell local companies to avoid Nvidia’s chips. However, there seems to be a real possibility that Nvidia will eventually be able to sell its products in China, and perhaps even more advanced chips than it had been selling.

In my opinion, this is also in a way the best part of the quarter because the stock and company are performing well without revenue from China, which is clearly material. While the government has reservations about selling U.S. chips in China, it probably would prefer a U.S. company to sell them over Chinese companies. The Wall Street Journal recently reported that Alibaba is working on a chip to fill the void left by the H20 chip. While Chinese companies don’t have the same chip capabilities as Nvidia right now, that could change one day.

So the opportunity to eventually reignite a business in a fast-growing market where the opportunity is tens of billions in additional annual revenue growth is the most exciting part of Nvidia’s recent quarter and near-term future prospects. Nvidia currently trades around 38 times forward earnings, which is above its five year average of 34.4.

That’s not cheap, especially for such a large company. However, given that revenue is expected to keep growing at a healthy clip and the potential upside from China, I do think investors can continue to buy the stock, although dollar-cost averaging is likely the best strategy right now with the stock trading at a stretched valuation.