• Nvidia just posted another glorious quarter, with revenue and earnings per share beating expectations.
• Gaming sales delivered a surprise boost for the company, but margin compression and muted guidance raised concern.
• Then just hours after the earnings report, the federal trade court struck down a wide swath of Trump tariffs, triggering a market rally. 

The United States Court of International Trade just upstaged Nvidia (NVDA). We expected to be obsessing today about the chip maker’s strong Q1 earnings report, but instead the court’s decision to strike down the Trump tariffs is dominating the news.

Nvidia posted another impressive quarter, with revenue beating expectations and data center sales notching new highs.

The company’s fiscal first-quarter revenue surged 69% year-over-year to $44.1 billion, comfortably ahead of expectations and up 12% from the previous quarter. Adjusted earnings per share came in at $0.96, with net income climbing 26% to $18.8 billion. Once again, Nvidia showed it’s the beating heart of the AI infrastructure boom. But while the company’s top line continues to expand at an extraordinary clip, this quarter brought both encouraging surprises and emerging concerns.

The data center segment remains Nvidia’s dominant engine, generating $39.1 billion in revenue — up 73% from a year ago and 10% sequentially. That business now accounts for nearly 90% of total revenue, highlighting the company’s central role in powering large language models and hyperscale AI platforms. But that dominance is starting to raise questions about concentration risk, especially as demand normalizes or regulators circle. A company once known for its broad-based portfolio is now more exposed than ever to a single growth vector.

That’s why the surge in gaming revenue came as a welcome upside surprise. Sales in the division jumped 42% year-over-year to a record $3.8 billion, exceeding expectations and reminding investors that Nvidia’s relevance extends well beyond the data center. The company didn’t break out specific revenue from Nintendo’s upcoming Switch 2 console, but the new device, which uses the company’s DLSS-powered processor, is believed to be a contributing factor. The strong gaming performance suggests management still has levers to pull outside the enterprise AI sector. 

At the same time, the quarter wasn’t without red flags. Gross margins declined significantly, pressured by a $4.5 billion charge related to unsold inventory of China-bound H20 chips. That setback, tied to tightening U.S. export controls, caused margins to fall well below recent levels and added fuel to broader concern about how geopolitical tension could affect the company. While Nvidia’s topline story remains intact, the bottom line showed cracks that will be harder to ignore if similar pressures persist.

In sum, Nvidia’s Q1 results were another powerful demonstration of its dominance, but also a signal that its challenges are growing more complex. AI demand remains strong, but the path forward isn’t without challenges. 

Margin pressure remains a concern

For all the headline strength in Nvidia’s Q1 report, one key metric told a more sobering story — margins. Gross margin dropped to 61% on a non-GAAP basis, well below last quarter’s 73.5% and down from 78.9% a year ago. Even when adjusting for the $4.5 billion inventory charge related to unsellable H20 chips — products hit by new U.S. export restrictions to China — margins still came in at 71.3%, marking a year-over-year decline of more than 700 basis points.

That wasn’t just an accounting anomaly. Nvidia’s underlying profitability trend has been moving in the wrong direction, reflecting a mix of rising production costs, pricing pressure and global policy friction. Taiwan Semiconductor (TSM), Nvidia’s primary foundry partner, has reportedly raised prices in response to soaring demand and limited capacity, squeezing Nvidia’s margins from below even as its chips continue to command premium prices.

The sequential margin contraction is particularly notable because it coincides with Nvidia’s smallest revenue beat in two years. While revenue still came in ahead of estimates by $728 million, that’s a modest beat by Nvidia standards. And it’s the first sub-$1 billion surprise since Q2 2023. As revenue growth normalizes and operating leverage flattens, investors may no longer be able to assume that Nvidia can expand margins and earnings at will.

Looking ahead, management guided to gross margins of around 72% in the current quarter, with a stated goal of reaching the mid-70% range by year-end. That’s a plausible target given improved product mix and the absence of additional China-related write-downs. Still, the margin question now looms larger than it has in years. For a stock trading at over 30x forward earnings, investors will be watching closely to see if Q1 marked a temporary dip or the start of a longer-term recalibration.

Takeaways

While Nvidia shares rose in the wake of its Q1 earnings, the broader market context suggests the rally may have had more to do with macro relief than company-specific performance. The surge in equities followed the ruling that blocked a swath of Trump tariffs, a decision that markets likely interpreted as easing trade tensions, particularly with China. Absent that legal development, Nvidia’s earnings could have easily sparked a “sell-the-news” reaction, as has occurred in previous quarters. After all, despite strong headline numbers, the company offered softer-than-expected guidance, with continuing trade restrictions dampening the near-term outlook. 

Analyst sentiment remains overwhelmingly bullish, with 63 of the 71 firms covering Nvidia rating it a “buy” or “overweight.” The average price target stands at $165 per share, well above the current share price of $140/share. But valuation remains a sticking point. The company’s stock trades at 32.8x forward earnings, above the sector median of 28.0x. On a price-to-sales basis, the gap is even more stark: 25.5x vs. 2.9x. And its price-to-book ratio sits at a lofty 41.8, compared to the industry median of just 3.3. These multiples imply that much of the company’s future upside is priced in and leaves little room for missteps.

That said, not all surprises in this report were unwelcome. The resurgence in Nvidia’s gaming division was a bright spot, with revenue jumping 42% and establishing a new record. If sustained, that momentum could help offset the rising concentration risk tied to the data center segment, which now accounts for nearly 90% of total revenue. All told, we continue to view Nvidia as a “buy” but not an automatic market leader. At these levels, Nvidia is more likely to move with the market than lead it.

Yesterday, the Trump administration unveiled a new wave of export restrictions targeting China’s access to advanced US technology, including semiconductor design software, jet engine components and sensitive industrial tools. The move, framed as a national security imperative, intensified the tit-for-tat between Washington and Beijing, with both sides weaponizing critical supply chains. For Nvidia and other chipmakers, it’s a stark reminder: Dominance in AI doesn’t insulate your company from the collateral damage of a tech cold war.

Andrew Prochnow, Luckbox analyst-at-large, has traded the global financial markets for more than 15 years, including 10 years as a professional options trader.

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