Nvidia (NVDA) Q3 Earnings Preview / Trade Ideas

by Dan November 15, 2018 1:01 pm • Trade Ideas

Nvidia (NVDA) will report their Q3 results tonight after the close. The options market is implying about a 9.5% one day move tomorrow, which is rich to the average over the last four quarters of about 5%. With the stock at $200.50, the Nov 16th 200 straddle (the call premium + the put premium) is offered at about $19, or about 10% of the stock price, if you bought that and thus the implied movement you would need a rally above $219, or a decline below $181 to make money by tomorrow’s close, or about 10% in either direction.

After being one of, if not the best-performing stocks in the S&P 500 (SPX) over the last few years, shares of NVDA are up only 3% on the year, after selling off $100, or about 35% since making an all-time high on Oct 2nd. In the last couple of weeks the stock has found some support near the 52-week lows near $180:

A look at the 5-year log chart and you get a sense of the rip-roaring outperformance since early 2016, a ten-bagger, but also just how precarious the $180 support level might prove to be:

 

The Nvidia story has been quite simple in hindsight, it has been one of the few ways in public markets investors could get exposure to emerging tech trends through a company whose chips are being used to stock datacenters that power AI and machine learning capabilities in all sorts of industries, autonomous driving, gaming and of course crypto mining. I think it is safe to say that the sell-off in mega-cap tech over the last couple of months reflects the fact that investors feel that the hype for these emerging technologies that so many of our favorite MAGA and FANG stocks like to tout might have gotten a tad ahead of itself. Investors were willing to stretch valuation bands of the justification of growth at a reasonable price (plus a great story of how they are using AI/ML to change an industry).

At this point, I think it is safe to say that investor expectations are not particularly high into the print, but the stock’s reaction to results is likely to be very important for the direction of mega-cap tech into year-end. After three consecutive years of 35% plus sales growth, NVDA is expected to see a massive downshift in the next fiscal year to about 13%, with GAAP eps growth expected to be about 9%. The stock trades at about 23x next year’s expected eps and about 8.25x expected sales, which is pretty hefty for a company with a $122 billion market cap.

So what’s the trade?

A beat and raise and the stock is probably up inline with the implied move… very near this month’s high, but also a level that might be seen as near-term technical resistance.

 

A miss and a guide down and the stock is likely headed back towards the recent lows above $170 which is also the 52-week lows:

 

Bullish Trade Idea: NVDA ($200.50) Buy Nov 16th 200 / 220 / 240 call Butterfly for $5

-Buy to open 1 Nov 200 call for 9.90

-Sell to open 2 Nov 220 calls at 2.60 each or 5.20 total

-Buy to open 1 Nov 240 call for 30 cents

Break-even on Nov 16th expiration:

Profits of up to 15 between 205 and 235 with max gain of 15 at 220

Losses of up to 5 between 200 & 205 and between 235 & 240 with max loss of 5 below 200 or above 240

Rationale: risking 5 or just 2% of the stock price to possibly make 15 if the stock is up at 220 on tomorrow’s close, in line with the implied move for earnings. The butterfly structure helps mitigate the expense of near-dated options and offers a wide range of profitability to the upside.

Or

Bearish Trade Idea: NVDA ($200.50) Buy Dec 200 / 160 put spread for $11

-Buy to open 1 Dec 200 put for $14

-Sell to open 1 Dec 160 put at $3

Break-even on Dec expiration:

Profits of up to 29 between 189 and 160 with max gain of 29 at 160 or lower

Losses of up to 11 between 189 and 200 with max loss of 11 above 200

Rationale: This trade idea risks 5.5% of the stock price, which is not insignificant for a 5-week trade, but for those looking to protect a long this could act as a decent near-term hedge if worried the stock could fall out of bed after earnings. This trade idea is very near the one that Mike Khouw detailed on CNBC’s Options Action on Friday, watch here.

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