Nvidia Corp. did just about everything it could today in reporting its third-quarter results, beating expectations on earnings and revenue, setting new records in the process, and following up with strong guidance for the next three month period.

But its stock still fell more than 2% in after-hours trading, as investors noted that revenue from its data center business is expected to decline sequentially in the current quarter.

The company, which makes graphics processing units for computers, cloud servers and games consoles, reported a profit before certain costs such as stock compensation of $2.91 per share on record revenue of $4.73 billion, up 57% from a year ago. Analysts had expected Nvidia to report earnings of $2.58 per share on $4.42 billion in revenue.

Wall Street had been expecting a big quarter from Nvidia and they definitely got one, with the company setting a new record for quarterly profit in addition to revenue.

The company’s success was driven by strong demand in its compute and networking business, which saw revenue jump to $1.94 billion, up 146% from the same period last year. Nvidia’s graphics segment did well too, as revenue rose 25%, to $2.79 billion.

In addition to reporting its revenue for those two segments, Nvidia also discloses revenue by which market its products are intended for.

During its last quarterly report, Nvidia Chief Executive Jensen Huang (pictured) said the company was expecting a strong second half of the year thanks to what it called “strong interest” its new line of Ampere graphics cards. One of those cards, the GeForce RTX 3080, sold out immediately when it went on sale in September.

Those sales helped push Nvidia’s revenue from gaming sales to $2.27 billion, up 37% from a year ago. The company said that was the result of record sales of its graphics cards to computer and console makers.

In addition, both Nvidia’s gaming and data center divisions have benefited from the COVID-19 pandemic, which has meant more people are staying at home working and playing video games.

“Nvidia is firing on all cylinders, achieving record revenues in Gaming, Data Center and overall,” Huang said in a statement today. “The new Nvidia GeForce RTX GPU provides our largest-ever generational leap and demand is overwhelming.”

Moor Insights & Strategy analyst Patrick Moorhead agreed, saying Nvidia’s new graphics cards are very competitive products. “I will be closely watching in the next quarter for competitive impacts and improvements due to major game titles dropping, like the new ‘Call of Duty Black Ops Cold War,’” he added.

The big surprise from Nvidia’s last financial report three months ago was that its data center revenue had surpassed gaming revenue for the first time. That didn’t happen this quarter, with Nvidia reporting sales of $1.9 billion in the data center, but it still jumpedp 162% from last year. Nvidia said that its acquisition of Mellanox, completed earlier this year, contributed to 13% of that total.

However, some investors may have had a bit of a shock during Nvidia’s conference call with analysts, as executives said data center revenue will decline in the next quarter. It said that is partly because an unnamed Chinese customer is no longer purchasing its Mellanox networking products.

But Nvidia’s long-term data center prospects remain strong. During the quarter it announced it’s partnering with VMware Inc. on a new enterprise platform for artificial intelligence workloads.

Moorhead noted that AI is already a very strong growth area for Nvidia, so many believe the VMware deal will only improve its prospects in that area. “Datacenter saw big increases from the Mellanox addition, but more of the growth was organic from machine learning,” Moorhead said.

“It has successful made its AI platform a part of Amazon Web Services, Microsoft Azure, Google Cloud and Oracle Cloud, so it partakes of AI-related cloud growth, as long as it can convince enterprises to ask these vendors to provide Nvidia GPUs,” said Constellation Research Inc. analyst Holger Mueller.

Nvidia also said it’s planning to buy semiconductor firm Arm Holdings Ltd. from SoftBank Group Corp. in a $40 billion deal that many expect will have significant implications for the industry. Arm is an important buy because it specializes in low-powered chips used in mobile devices, an area where Nvidia is weak, and it also supplies technology to many of Nvidia’s rivals. Nvidia said today it expects to complete that acquisition during the first quarter of next year.

Mueller said the main concern for Nvidia right now is that sales, marketing and G&A costs are climbing relative to research and development. “Clearly acquisition related costs are a factor, but Nvidia needs to keep investing into R&D while watching the other cost drivers,” he said.

For the fourth quarter, Nvidia is expecting to revenue of about $4.8 billion, well ahead of Wall Street’s estimate of $4.42 billion.

Photo: Nvidia