NVIDIA Corporation Looks to PC Gamers for Post-Earnings NVDA Stock Rally

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Nvidia Corporation (NVDA) will join the dwindling corporate earnings lineup this week, and NVDA stock looks well positioned to bounce higher following the report.

Nvidia NVDA 185By the numbers, Wall Street is looking for earnings to rise 33% year-over-year to 32 cents per share, with revenue up 10% at $1.27 billion.  Despite a slowdown in the PC market, Nvidia has capitalized on growth in the PC gaming market.  As a result, Nvidia came out of 2015 with year-over-year revenue growth of 7%, compared to declines for semiconductor giants Intel Corporation (INTC) and Qualcomm (QCOM) and direct gaming competitor Advanced Micro Devices (AMD).

Analysts are quietly hopeful that the first quarter will show signs that this strength will spill over into 2016.  In fact, EarningsWhisper.com reports that the first-quarter whisper number for NVDA stock comes in at 34 cents per share, two cents better than the consensus.

Quiet is the word, however, as more public ratings stances from most brokerage firms are of a more neutral-to-bearish nature.  Specifically, Thomson/First Call reports that 17 of the 28 analysts following NVDA stock rate it a “hold” or worse, compared to just 11 “buy” ratings. Additionally, the 12-month consensus price-target of $37.08 represents a minor premium of only about 5.1% to yesterday’s close.

Elsewhere, short sellers are beginning to rethink their positions on NVDA stock. During the most recent reporting period, the number of NVDA shares sold short fell by 15%, leaving roughly 64.8 million shorted shares. This accumulation represents a sizable 12.65% of NVDA’s total float, or shares available for public trading, and could provide ample fuel for a short-covering rally.

But, looking at NVDA’s options configuration, short sellers are none too worried about a post-earnings rally. Typically, short sellers will buy short-term call options as a way to hedge their positions, but NVDA’s weekly May 13 series put/call open interest ratio of 0.94 reveals very little preference for calls ahead of the company’s quarterly report. What’s more, this ratio turns slightly lower when we take in May OI as a whole, but a reading of 0.89 is still indicative of very little concern from the short-selling crowd.

NVDA-stock-chartOverall, weekly May 13 series options are pricing in a potential post earnings move of about 8.4%. This places the upper bound at $38.22, while the lower bound lies at $32.28.  A rally would send Nvidia stock to its highest perch since 2007 — potentially feeding a short-squeeze rally. Meanwhile, a decline would breach several key support levels, with NVDA potentially retesting $30 as a result.

2 Trades for NVDA Stock

Call Spread: Traders looking to capitalize on a post-earnings rally for NVDA stock might want to consider a May $36/$37 bull call spread. At last check, this spread was offered at 30 cents, or $30 per pair of contracts. Breakeven lies at $36.20, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if NVDA closes at or above $37 when May options expire.

Put Sell: On the other hand, if an outright bullish call on NVDA stock doesn’t fit your risk profile, then a weekly May 13 series $30.50 put sell may be more in line with your expectations. At last check, this put was bid at 11 cents, or $11 per contract. If NVDA closes at or above $30.50 by the close on this Friday, traders entering this position will retain the premium received for opening the position. However, if NVDA trades below $30.50 ahead of expiration, then traders may be assigned 100 shares at a price of $30.50 per share, for every contract sold.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/05/nvidia-corporation-nvda-stock-earnings-q1/.

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