NVIDIA (NVDA) Q1 FY2026 Earnings Report

May 28, 2025

Analyzed by Grok.

As an institutional investor in NVDA, the earnings report provides critical insights for deciding whether to trim or add to your position. Below is an analysis of the most important factors from the report, focusing on their implications for your investment strategy:

Key Information from the Q1 FY2026 Earnings Report

1. Revenue Growth:
   • Q1 Revenue: $44.1 billion, up 12% quarter-over-quarter (Q4 FY2025: $39.3 billion) and 69% year-over-year (Q1 FY2025: $26.0 billion).
   • Data Center Revenue: $39.1 billion, up 10% from Q4 and 73% from a year ago, reflecting NVIDIA’s dominance in AI infrastructure.
   • Implication: Strong revenue growth, particularly in the Data Center segment (89% of total revenue), signals robust demand for NVIDIA’s AI and computing solutions. This supports adding to the position, as the core business remains a leader in the high-growth AI market. However, the growth rate has slowed compared to previous quarters, which may warrant caution.
2. H20 Export Restrictions and Financial Impact:
   • H20 Charge: A $4.5 billion charge due to excess inventory and purchase obligations for H20 products, triggered by new U.S. export licensing requirements for China announced on April 9, 2025. This led to a $2.5 billion shortfall in H20 revenue that couldn’t be shipped in Q1.
   • H20 Sales: $4.6 billion in Q1 before the restrictions, indicating China was a significant market.
   • Outlook Impact: Q2 revenue guidance of $45.0 billion (±2%) reflects an $8.0 billion loss in H20 revenue due to ongoing export controls.
   • Gross Margin Impact: GAAP gross margin was 60.5%, and non-GAAP was 61.0%. Excluding the H20 charge, non-GAAP gross margin would have been 71.3%, closer to the 73.5% in Q4 FY2025.
   • Earnings Impact: Non-GAAP EPS was $0.81, but excluding the H20 charge, it would have been $0.96, indicating the charge reduced EPS by ~16%.
   • Implication: The H20 charge and lost revenue highlight significant exposure to geopolitical risks, particularly in China, a key market. The $8.0 billion projected revenue loss in Q2 suggests continued pressure, which could justify trimming the position to mitigate risk. However, NVIDIA’s ability to maintain strong margins (71.3% non-GAAP, excluding the charge) and its guidance for mid-70% margins later in FY2026 indicate resilience.
3. Gross Margin Trends:
   • Q1 Margins: GAAP gross margin (60.5%) and non-GAAP gross margin (61.0%) declined significantly from Q4 FY2025 (73.0% GAAP, 73.5% non-GAAP) due to the H20 charge.
   • Outlook: Q2 GAAP and non-GAAP gross margins are expected to recover to 71.8% and 72.0%, respectively, with a goal of mid-70% margins by year-end.
   • Implication: The margin contraction is largely due to the one-time H20 charge, and the expected recovery suggests NVIDIA’s pricing power and cost management remain strong. This supports holding or adding to the position, provided geopolitical risks are managed.
4. Earnings and Profitability:
   • Q1 GAAP Net Income: $18.8 billion, down 15% from Q4 FY2025 ($22.1 billion) but up 26% from Q1 FY2025 ($14.9 billion).
   • Non-GAAP EPS: $0.81, down 9% from Q4 ($0.89) but up 33% from Q1 FY2025 ($0.61). Excluding the H20 charge, non-GAAP EPS would have been $0.96.
   • Implication: Profitability remains robust despite the H20 charge, with year-over-year growth in net income and EPS reflecting strong operational performance. The adjusted EPS of $0.96 suggests that the core business remains highly profitable, supporting a case for adding to the position if the China-related risks are deemed manageable.
5. Balance Sheet and Cash Flow:
   • Cash and Equivalents: Increased to $15.2 billion from $8.6 billion at the end of Q4 FY2025.
   • Free Cash Flow: $26.1 billion in Q1, up from $15.5 billion in Q4 FY2025, driven by strong operating cash flow ($27.4 billion).
   • Share Repurchasing: $14.1 billion in stock repurchases, signaling management’s confidence in long-term value but reducing cash reserves.
   • Implication: A strong balance sheet and robust free cash flow provide financial flexibility to weather geopolitical challenges and invest in growth (e.g., Blackwell production, AI factories). This strengthens the case for holding or adding to the position, although aggressive buybacks may concern investors who prioritize cash preservation.
6. Guidance and Market Outlook:
   • Q2 Revenue Guidance: $45.0 billion (±2%), implying modest sequential growth but reflecting the $8.0 billion H20 revenue loss.
   • AI Demand: CEO Jensen Huang emphasized “incredibly strong” global demand for AI infrastructure, with AI inference token generation surging tenfold in a year and growing demand for AI agents and reasoning models (e.g., Blackwell NVL72).
   • Implication: The modest Q2 guidance reflects China-related headwinds but also NVIDIA’s confidence in offsetting losses through growth in other markets and products (e.g., Blackwell Ultra, DGX Cloud). The long-term AI growth narrative remains intact, supporting adding to the position, but near-term uncertainty may warrant caution.
7. Segment Performance:
   • Gaming: $3.8 billion, up 48% from Q4 and 42% from Q1 FY2025, driven by new RTX 5060/5070 GPUs and AI-powered DLSS.
   • Automotive: $567 million, down 1% from Q4 but up 72% from Q1 FY2025, reflecting growth in AI-driven automotive solutions.
   • Professional Visualization: $509 million, flat from Q4 but up 19% from Q1 FY2025.
   • Implication: Diversification across segments reduces reliance on Data Center, though it remains the primary driver. Strong Gaming growth and Automotive potential add resilience, supporting a hold or add strategy.
8. Geopolitical and Competitive Risks:
   • China Exposure: The H20 restrictions highlight NVIDIA’s vulnerability to U.S.-China trade tensions, which could persist or worsen.
   • Competition: Although not directly addressed, competitors such as AMD and Intel are investing heavily in AI chips, and hyperscalers (e.g., AWS, Google) are developing custom silicon, which could pressure NVIDIA’s market share.
   • Implication: Geopolitical risks and potential competitive pressures justify caution and possibly trimming the position, especially if China’s market access remains restricted.
9. Innovation and Strategic Initiatives:
   • Blackwell Platform: Full-scale production of the Blackwell NVL72 AI supercomputer and availability on major cloud platforms (AWS, Google Cloud, Azure) signal NVIDIA’s leadership in AI reasoning.
   • Global AI Factories: Partnerships (e.g., HUMAIN, Foxconn, G42) and U.S. factory investments underscore NVIDIA’s role in building AI infrastructure globally.
   • Implication: NVIDIA’s innovation pipeline and strategic partnerships reinforce its long-term growth potential, supporting adding to the position for investors with a high risk tolerance.

Decision Framework: Trim or Add to Position?

Reasons to Add to Position:

• Strong AI Demand: The 73% year-over-year Data Center growth and tenfold surge in AI inference token generation confirm NVIDIA’s central role in the AI boom.
• Resilient Margins: Excluding the H20 charge, non-GAAP gross margin (71.3%) and Q2 guidance (72.0%) indicate strong pricing power and cost control.
• Robust Cash Flow: $26.1 billion in free cash flow provides flexibility for R&D, acquisitions, and navigating challenges.
• Diversified Growth: Gaming (+42% Y/Y) and Automotive (+72% Y/Y) segments show NVIDIA’s ability to grow beyond Data Center.
• Innovation Leadership: Blackwell Ultra, AI factories, and partnerships with hyperscalers and governments position NVIDIA for long-term dominance.

Reasons to Trim Position:

• Geopolitical Risk: The $4.5 billion H20 charge and $8.0 billion Q2 revenue loss highlight significant exposure to China, with ongoing export controls posing risks to future revenue.
• Margin Pressure: The drop to 60.5% GAAP gross margin (from 73.0% in Q4) and modest Q2 guidance suggest near-term profitability challenges.
• Slowing Growth: Sequential revenue growth (+12%) is slower than prior quarters, and Q2 guidance implies flat growth due to H20 losses.
• Valuation Concerns: Aggressive share buybacks ($14.1 billion) and a high valuation (not specified in the report but implied by market dynamics) may concern investors if growth slows further.
• Competitive Threats: Increasing competition in AI chips could erode NVIDIA’s market share over time.

Recommendation

• Balanced Approach: Given the mixed signals, a balanced strategy is prudent. Hold the current position to maintain exposure to NVIDIA’s long-term AI growth while monitoring the impact of China restrictions and competitive dynamics.
• Add Opportunistically: If the stock price dips due to market reactions to the H20 charge or China risks, consider adding to the position, as the core AI business remains strong, and margins are expected to recover. The adjusted non-GAAP EPS ($0.96) and Q2 gross margin guidance (72.0%) suggest the H20 impact is a short-term headwind.
• Trim if Risk Averse: If your portfolio is heavily weighted toward NVIDIA or you prioritize stability, consider trimming 10-20% of the position to reduce exposure to geopolitical risks and potential margin compression. Reinvest in diversified tech or AI-related stocks (e.g., AMD, TSM) to maintain sector exposure.

Key Metrics to Monitor

• Q2 H20 Impact: Track whether the $8.0 billion revenue loss is offset by growth in other regions or products.
• Gross Margin Recovery: Confirm if NVIDIA achieves mid-70% margins by late FY2026.
• China Market Developments: Monitor U.S.-China trade policies and NVIDIA’s ability to pivot to alternative markets or products.
• Competitive Landscape: Watch for updates on competitors’ AI chip advancements and hyperscaler adoption of custom silicon.

This analysis assumes you have a long-term investment horizon and a moderate risk tolerance.