Shares of NVIDIA (NVDA 0.35%) surged to a new all-time high last week, eclipsing the stock's previous high in 2018, following the better-than-expected earnings results on Feb. 13. The stock has since given back those gains over coronavirus fear. NVIDIA said it expects the COVID-19 outbreak to cut about $100 million, or 3%, from its total revenue next quarter. 

Leaving the near-term concerns aside, here are three highlights from the quarter that can explain the recent surge in investor enthusiasm.

Large office building with the NVIDIA corporate logo displayed on a wall near the entrance.

Image source: NVIDIA.

1. Gaming is returning to growth

Gaming makes up roughly half of NVIDIA's business, so it is an important segment to watch. Gaming revenue soared 56% year over year last quarter. Growth was expected to be high, given the lower revenue in the year-ago quarter, which made for an easier year-over-year comparison. But the recent growth spurt shows NVIDIA has fully recovered from the oversupply of cards sitting on the market following the cryptocurrency bubble in 2018. 

Even though revenue was down 10% over the previous quarter, investors were pleased to see the segment trending back to growth on a year-over-year basis. And this time, there is no cryptocurrency to dilute the actual demand coming from gamers.

During the conference call, CFO Colette Kress expressed exuberance, stating that "gaming is thriving." She explained that NVIDIA is continuing to benefit from several trends, including the growth in esports, new games coming out that support NVIDIA's RTX ray-tracing technology, and the booming demand for gaming notebooks. 

2. Data center had a record quarter

Investors were likely the most impressed by NVIDIA's data-center growth, which hit a new quarterly record of $968 million in revenue, now representing a third of NVIDIA's total business. The performance here was phenomenal.

Data center revenue climbed 43% year over year and 33% sequentially over the previous quarter. Management credited the growth to hyperscale demand, driven by the need for powerful chips for AI workloads. The company referenced a who's-who list of customers using its chips, including AmazonMicrosoft, Alibaba, Baidu, and Domino's Pizza, where the pizza chain is relying on deep learning to help with customer engagement and order accuracy prediction. 

The high demand in data center drove a massive boost to gross margin, which improved by a staggering 10 percentage points compared to the year-ago quarter. This helped fuel a 66% year-over-year increase in earnings for the quarter.

3. Operating cash flow hits a record

The improving margins helped fill the company's cash coffers. For the full year, cash from operating activities reached a record $4.76 billion. The company spent $489 million on capital expenditures, so that left $4.3 billion in free cash flow, representing growth of 36% over the previous year. 

NVIDIA now has $8.9 billion in net cash, but $6.9 billion of that will be used to acquire Mellanox Technologies. The acquisition was announced last year and is expected to close in the next few months. 

NVIDIA has made it a focus to return cash to shareholders over the last decade, and the recent improvement in free cash flow could fuel further increases to the dividend payout. The total cash distribution for dividends last year was only $390 million, leaving plenty of room to pay out more. NVIDIA plans to resume share repurchases once the Mellanox transaction is complete. 

Looking ahead

During the call, Kress stated that the data center segment should "see continued growth" in the first quarter. But gaming momentum could hit a speed bump given that China makes up 30% of NVIDIA's gaming business, and the coronavirus situation is still up in the air. 

Given the evolving situation with the outbreak, gaming is expected to experience another double-digit sequential decline in the next quarter, but in the longer term, the underlying fundamentals continue to look healthy for this tech stock. Gaming, data center, and autonomous vehicles are long-term growth trends that NVIDIA is well-positioned to capitalize on with its chip technology.