Nvidia (NVDA) will report its FQ1 earnings today after the close. The options market is implying about a 7% one day move tomorrow which is in line with its one-day average move over the last four quarters.
Shares of NVDA are up 52% on the year, 2% from its all-time high made on Tuesday, and up a whopping 100% from its March lows. There is obviously no overhead resistance, with near-term support between $300 & $315:
NVDA’s market capitalization at $220 billion places it 16.4x its expected FY2021 sales of $13 billion that are expected to grow 23% you. It is worth noting that Intel (INTC) which is expected to book $73 billion in sales this year (only growing 2% you) sports a $265 billion market cap, while smaller competitor AMD trades at only 7.7x it’s expected $8.4 billion in sales this year. Valuations in the semi space are all over the map but make no mistake, for the moment NVDA is the perceived winner in a post-pandemic world.
Wall Street analysts are overwhelmingly bullish on the stock with 35 Buy ratings, 5 Holds and 3 Sells.
My friend Jared Weisfeld, Tech Specialist at Jeffries (who you might have recently seen talking semis with me and the Fast Money crew last week here) laid out the set-up into the print in his note this morning:
NVDA EARNINGS SET-UP. The NVDA set-up is an interesting one with the stock pegged at all-time highs heading into the print so needless to say, expectations are 10/10 as NVDA continues to be viewed as one of the best structural growth stories within semis and the market. The set-up is also bolstered by an intra-quarter CFO update where the Company was quite bullish on Data Center Trends and gaming rebounding in the APAC region post-COVID. Also recall that NVDA closed the MLNX acquisition on 4/28 so it’s a bit messy heading into the July quarter and not all estimates are apples to apples.
From an April quarter perspective, the street is sitting at $3BN in revenues, right in-line with the midpoint of Company guidance. The Company’s guidance assumed a $100mm revenue impact associated from a COVID-19 perspective, split between gaming and Data Center. As always, Data Center remains the key investor focus and StreetAccount has Datacenter revenue at $1.08BN, growing +~11.6% sequentially. That seems a bit high relative to some that I’ve spoken with using detailed consensus estimate services but bottom-line is that the buyside is looking for at least 15% q/q data center growth into the April quarter (there are some outliers looking for more but ~15% q/q growth is the median). That should be achievable given the current environment with Data Center spend accelerating meaningfully but it’s not as simple as assuming that the magnitude of the INTC upside will necessarily translate into NVDA upside to the same extent. In the context of COVID-19 and WFH environments, organizations were struggling to get infrastructures up and running and INTC is a capacity purchase, facilitating INTC DCG Growth of +43% y/y in the March quarter. The core gaming business should also be inflecting given shelter-in-place orders have created a meaningful tailwind for the video game publishers, directly benefiting from increased engagement.
Into the July quarter, while the company doesn’t formally guide growth by segment, they’ll give another commentary to help infer the growth trajectory. Consensus for Data Center sequential revenue growth is sitting at +10% q/q to ~$1.19BN but that’s not a clean-number as some analysts are including MLNX. The street is up about ~6% q/q organically (excluding MLNX) and buyside is anticipating a roughly in-line guide from that vantage point. This is where we may see some risk considering that there may be a pause ahead of the Ampere 7nm launch, which won’t ramp in earnest until the October quarter. MLNX should add about $350mm of incremental revenue from a guidance standpoint.
My takeaway from Jared’s commentary is that expectations are extremely high, and a lot of good news regarding the July quarter guidance is likely in the stock at current levels.
SO what’s the trade?
If I were long the stock I might consider hedges… possibly a collar, for instance…
Hedge Idea: vs 100 shares NVDA long at $356 buy the June 335 – 380 collar for even money
-Sell to open 1 June 380 call at $13.50
-Buy to open 1 June 335 put for $13.50
Break-even on June expiration:
Gains of the stock up to 380. if the stock is above 380 on June expiration the long stock position will be called away up nearly 7%, unless the short call is covered in an effort to keep the long stock position intact.
Losses of the stock down to 335, protected below.
Rationale: one would collar their position in front of a potentially volatile event like earnings if they were more concerned about the defined risk to the downside and willing to give up some potential upside to get low to no-cost protection.
Or
Bearish Idea: NVDA ($356) Buy June 340 – 300 – 260 Put Fly for $7
-Buy to open 1 June 340 put for 16
-Sell to open 2 June 300 puts at 5 each or 10 total
-Buy to open 1 June 260 put for $1
Break-even on June expiration:
Profits of up to 33 between 333 and 267 with max gain of 33 at 300
Losses of up to 7 between 333 and 340 & between 260 and 267 with max loss of 7 above 340 and below 260
Rationale: this trade idea risks 2% of the stock price, has a break-even down 6.5% but has a potential payout of nearly 5x the premium at risk if the stock is down near support at 300 in the next few weeks.
For a Bullish trade idea there is really no other way to put it, you would be merely gambling on continued momentum, risk what you are willing to lose buying an at the money call which in the May weeklies would cost you about 3.5% of the stock price.
But I’ll offer my usual disclaimer for long premium short-dated directional trades into events like earnings, especially in stocks were options premiums are very elevated… you need to get a lot of things right to merely break-even, first and foremost direction, the magnitude of the move and of course timing.