6 Key Themes From Nvidia's Q1

Nvidia Corporation NVDA shares were up another 6 percent on Thursday and are now up 22 percent this week after the company reported a huge Q1 earnings beat.

Now that Wall Street has had time to digest Nvidia’s monster quarter, here’s a look at some of the key themes analysts are focusing on.

1. Artificial intelligence opportunity

Datacenter revenue was up 38 percent quarter-over-quarter and 186 percent from a year ago.

“We think NVDA’s near decade of investment in CUDA and its APIs have put it years ahead of the competition—said another way, NVDA-CUDA appears to be emerging as the ‘Wintel of AI,’” Jefferies analyst Mark Lipacis said.

2. Auto sales strength

Auto sales climbed to $140 million on the quarter, and the push toward increasingly technologically advanced automobiles could be a long-term tailwind for Nvidia.

“Autonomous driving remains a long-term opportunity given recent design wins at Bosch ad ZF, and developmental engagements with customer organizations grew 50% qoq,” UBS analyst Stephen Chin explained.

Related Link: Bull & Bear Takeaways From Nvidia's Q1 Beat

3. Gaming weakness

Disappointments on the quarter were few and far between, but the company’s gaming business was one of them.

“While gaming revenue was up an impressive 49% Y/Y, it did come in a bit lighter than our/consensus estimates,” Canaccord Genuity analyst Matthew Ramsay said.

4. Bears missed the mark

Nvidia bears that anticipated gaming weakness would lead to a market sell-off were overly pessimistic. Loop Capital analyst Betsy Van Hees said “shorts were being squeezed because they couldn’t see the forest through the trees.”

5. Gross margin pressures

Gross margins were up 1 percent from Q1 2016, but some analysts believe they could come under pressure in the future.

“While our [bearish] investment thesis has been challenged in the near-term, we remain Underweight NVDA due to signs of desktop GPU market saturation, lower margins from incremental Nintendo Switch revenue and the stock’s premium valuation,” Pacific Crest analyst Michael McConnell said.

6. Stock valuation getting steeper an steeper

Following the earnings jump, Nvidia shares are now up 598 percent in the past three years.

“At these levels, we view risk/reward as balanced and remain on the sidelines for now,” Oppenheimer analyst Rick Schafer said.

Image Credit: By yoggy0 from Yokohama, Japan (SIGGRAPH Asia 2009) [CC BY 2.0], via Wikimedia Commons