Nvidia Shares Edge Higher After Q1 Earnings Beat; Rising Costs Offset Data Center Demand Surge

Nvidia expects operating costs to rise to $4.1 billion as it absorbs last year's Mellanox acquisition, with some analysts trimming earnings 2020 earnings forecasts as a result.

Nvidia Corp  (NVDA) - Get Report shares edged higher Friday as U.S.-China tensions pressured global markets, offsetting a solid first quarter earnings report that included more than $1 billion in data center chip sales and improving profit margins.

Nvidia said non-GAAP earnings for the three months ending on April 26 were pegged at $1.80 per share, more than double last year's tally and firmly ahead of the Street consensus forecast of $1.69 per share. Group revenues, lead by an 80% year-on-year increase in data center chip sales, rose 38.7% to a forecast-beating $3.08 billion.

The data center demand, powered by work-from-home shifts at the biggest companies in the world, is likely to support current quarter revenues, as well, with Nvidia guiding investors to a stronger-than-expected $3.65 billion tally, plus or minus 2%, thanks in part to last year's $6.9 billion purchase of Mellanox Technologies.

"The new NVIDIA has a much larger footprint in data center computing, end-to-end and full stack expertise in data center architectures and tremendous scale to accelerate innovation," CEO Jensen Huang told investors on a conference call late Thursday. "NVIDIA and Mellanox are a perfect combination and position us for the major forces shaping the IT industry today, data center scale computing and AI."

"This is the era of data center scale computing and together, NVIDIA and Mellanox can architect end-to-end," he added. "Mellanox is an extraordinary company and I'm thrilled that we're now one force to invent the future together."

Nvidia shares were marked 1.1% higher in earkt trading Friday $355.00 each, a move that would  leave the stocks with a robust year-to-date gain of nearly 50%.

Increased operating expenses could be another reason why Nvidia shares are likely to open flat or to the downside Friday, with the non-GAAP figure expected to rise 26.7% quarter-on-quarter to just over $1 billion as the group absorbs Mellanox employees and ramps up investment. Non-GAAP expenses for the full year, Nvidia said, are likely to pass $4 billion. 

That said, the group still sees current quarter gross margins of 66% on a non-GAAP basis, another company record.

"NVIDIA delivered on high expectations," said BMO Capital Markets analyst Ambrish Srivastava, who carries a $425 price target and an outperform rating on the stock. "The company's visibility appears to continue to be strong in that business into the next quarter as well. The Gaming and other businesses were more or less as expected."

"Commentary around what should be ongoing strength in GM stands out for us," he added. "Our pro forma estimates are going higher as we now account for Mellanox, while our GAAP estimates are consequently lower."