In early October, when Nvidia (NVDA) was up only 100% on the year I think we fairly succinctly got to the bottom of what was going on in the stock (Graphic Novel). In a year that saw massive out-performance by the semiconductor space (Philadelphia Semi Conductor Index – SOX was up 35% vs S&P 500 up 9.5% and Nasdaq Composite up 7.5%), NVDA blew the doors off, up 223%, the best performing stock in the SPX, eventually sporting a market capitalization of greater than $60 billion!
The fever has since broken since its highs on Dec 28th near $120, with the stock now testing bear market territory at the nice round number of $100. To my eye, and this is probably quite obvious, there appears to be an air-pocket down to the stock’s 100 day moving average, which also corresponds with the 30% one day post Q3 earnings gap of November 10th:
As unknown the story might have been in at $60 in September to the general investing public, it was equally well known at $120 in December. Just as stocks with great stories tend to overshoot on the upside, they can do so on the downside. I am not saying that is going to happen, but the higher it went the less buyers that can afford the company. And that leaves one less pillar the bull story. Let’s not forget that M&A in the semi space in 2015/16 was a major factor in the groups outperformance, and while some of the deals were huge in both size and multiples (we wrote about it here: Semi-Palooza) the later we get in the cycle the less likely it will be that acquirers will see their stock’s rise along with their targets.
Short dated options prices have been rising with the stock’s volatility as one would expect over the last month, with 30 day at the money implied volatility approaching levels only seen just prior to earnings announcements, despite the fact the company is not expected to report until mid February:
Relatively high levels of options prices make long premium directional strategies challenging between now and earnings (yet to be confirmed, Bloomberg estimates Feb 15th). That said, with nearly a month to expiration the February 100 straddle (the call premium + the put premium) is offered at about $13, that is implying a $13 move in either direction between now and February expiration, including earnings, which over the last 4 quarters had averaged about 15%. So that seems fair. But there is also a case to be made that after such a parabolic move, then a 20% re-tracement the stock might find some support around a nice fat round number of 100. We will be sure to check back in on this one once their earnings date is set, and after we start to get results and guidance from competitors and customers.