Nvidia (NVDA) – Chip of Fools?

by Dan November 8, 2017 1:14 pm • Trade Ideas

Nvidia (NVDA) will report their Q3 results tomorrow after the close. The options market is implying about a 8% one day move on Friday, which is shy of the average over the last four quarters of about 14%.

Shares of NVDA are up 95% on the year, this after gaining more than 200% in 2016, with the stock sporting a market capitalization of $125 billion, making it the second largest semiconductor stock listed in the U.S. behind Intel (INTC), 25% greater than Qualcomm (QCOM) a company with $23 billion in annual sales, and Texas Instruments (TXN) with $15 billion in sales vs NVDA’s $9 billion in sales. Normally you could say well QCOM & TXN sales are growing much slower than NVDA’s, which has been the case, but NVDA’s expected deceleration in sales growth in fiscal 2019 to 13% might cause some investors to rethink paying 45x earnings and 13x sales when stocks like QCOM and TXN trade much closer to market multiples for high single-digit sales growth. But betting against multiple compression in NVDA has been a fools errand, not to mention very costly for two years. I guess the question NVDA bulls need to get comfortable with is the rumored cooperation between rivals INTC and AMD to use AMD gpu with INTC cpu for gaming in thin laptops will the sort of thing that could eat into market-share or potentially margins depending on pricing. But thats a ways off, and at this point I suspect the most likely thing that could derail the stock’s epic run would be the slightest change in sentiment.

While Wall Street analysts are fairly mixed on the stock with 19 Buy ratings, 13 Holds and 4 Sells, short interest is at minuscule 3% of the float, suggesting short sellers have all but given up. Over the last three years (12 quarters), throughout its epic run, there have been four earnings reports that have caused the stock to rally the next day between 12% & 18% and one causing a 30% explosion in November 2016.

Shares of NVDA are up 35% since its Aug 11th post Q2 earnings gap lower of 5.5%, having just made a new all-time high yesterday:

I’d say a beat and raise is in the stock 😉

I would not buy this stock with your money here… and frankly, despite elevated options prices, long premium short bets (as a trade) look like a better than decent risk-reward given the stock’s run into the print.

So what’s the trade? A move to the downside inline with the implied move with the stock at $209 would place the stock in the high $180s…. If you thought there is a good chance of a 10% one-day post-earnings decline than this is one way to play…

Bearish/ Hedge:

Trade Idea: NVDA ($209) Buy Nov10th 207.50 / 190 put spread for $6

-Buy 1 Nov10th 207.50 put for $7.50

-Sell 1 Nov10th 190 put at $1.50

Break-Even on Nov10th (Friday’s) close:

Profits of up to $11.50 between 201.50 and 190 with max gain of 11.50 at 190 or lower.

Losses of up to 6 between 201.50 and 207.50 with max loss of 6, or ~3%

Rationale: Could a beat and raise cause the sort of outsized post-earnings move that we have seen on numerous times over the last two years? Sure but as the stock goes higher, and the market cap gets larger, the potential for large moves gets more difficult, especially when you consider how much the stock has appreciated and how few traders are betting against it.

I’ll offer my usual disclaimer for long premium directional trades, you need to get a lot of things right to merely break-even, direction, timing and magnitude of the move. Risking 3% to possibly make 5.2% if the stock were to decline 10% in two days, not exactly a high probability outcome, but this trade structure could serve as a decent near-term hedge for long holders.