Nvidia Corporation (NASDAQ:NVDA) will step onto the earnings stage after the close of trading this afternoon. Investors — no doubt tired of the listing performance of NVDA stock — are hoping that its fortunes are better than the rest of the semiconductor sector.
So far this earnings season, the shares of both Advanced Micro Devices, Inc. (NASDAQ:AMD) and sector leader Intel Corporation (NASDAQ:INTC) took rather large hits immediately following their respective quarterly reports, and, judging by Nvidia’s options activity, traders are worried that a similar fate awaits them this evening.
Diving straight into the numbers, Wall Street is expecting a profit of 67 cents per share, more than double year-ago results of just 33 cents per share. Revenue is seen soaring more than 46% year-over-year to $1.91 billion.
However, expectations may be a bit higher that Wall Street is admitting, with the whisper number coming in at a profit of 72 cents per share, according to EarningsWhispers.com.
Despite the elevated whisper number, analysts are far from excessively bullish. According to Thomson/First Call, 18 of the 38 brokerage firms following NVDA stock rate the shares a “hold” or worse. What’s more, the 12-month consensus price target of $109.97 rests a mere 7% north of yesterday’s close.
In other words, if Nvidia can buck the trend of disappointing results from semiconductor companies, there is plenty of room for the analyst community to show a little love.
Short sellers are also jumping on the bearish bandwagon ahead of tonight’s report. During the most recent reporting period, the number of NVDA shares sold short rose by 9% to 26.8 million. With roughly 4.77% of Nvidia stock now sold short, there is ample fuel for a short squeeze play if NVDA heads higher following earnings.
Click to Enlarge Furthermore, these short sellers don’t appear to be worried about a post earnings rally at all. Currently, Nvidia’s 12 May put/call open interest ratio rests at a near-term peak of 1.40, with puts easily outnumbering calls among those options most affected by tonight’s report.
With a wealth of put OI currently levied against NVDA stock, it’s clear that short sellers aren’t buying calls to hedge their positions — potentially increasing the chances of a covering rally if things go Nvidia’s way.
As for May 12 implieds, options traders are pricing in a potential post-earnings move of about 8% for Nvidia shares. This places the upper bound at about $111.76 (well above the 12-month consensus price target), while the lower bound lies near $94.24, below support at $100 and its 2017 lows near $95.
2 Earnings Trades for NVDA Stock
Call Spread: With expectations low following earnings misses from Intel and AMD, Nvidia has a chance to impress investors and analysts with tonight’s quarterly report. Those traders looking to take advantage of this low-expectations environment might want to consider a 12 May $104/$107 bull call spread.
At last check, this spread was offered at $1.05, or $105 per pair of contracts. Breakeven lies at $105.05, while a maximum profit of $1.97, or $197 per pair of contracts, is possible if NVDA stock closes at or above $107 when 12 May options expire at the end of this week.
Put Spread: On the other hand, semiconductor companies don’t have a very good track record this earnings season, and there are still lingering bullish expectations for Nvidia given the stock’s 2016 rally. As such, traders looking follow the bearish crowd might want to consider a 12 May $98/$100 bear put spread.
At last check, this spread was offered at 70 cents, or $70 per pair of contracts. Breakeven lies at $99.30, while a maximum profit of $1.30, or $130 per pair of contracts, is possible if Nvidia stock closes at or below $98 when 12 May options expire at the end of this week.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
