Go Short Nvidia Corporation (NVDA) Stock Before Q4 Earnings

NVDA stock - Go Short Nvidia Corporation (NVDA) Stock Before Q4 Earnings

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Nvidia Corporation (NASDAQ:NVDA) reports its fourth-quarter earnings after Thursday’s close. Wall Street expects profits to more than double to 84 cents per share, and revenues to balloon by 50% to $2.11 billion. However, while the top and bottom lines continue to grow, the price of NVDA stock has risen exponentially faster.

Go Short Nvidia Corporation (NVDA) Stock Before Q4 Earnings

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In fact, it has become a case of too far, too fast for NVDA. So unless the graphics chip specialist has an absolutely blow-out quarter, I look for Nvidia stock to have difficulty moving appreciably higher.

Nvidia was one of the best performing stocks of 2016, gaining almost 225%. Importantly, though, the price-to-earnings multiple expanded at a much faster rate, fueling much of the rally, and now stands at its highest level of the past five years.

NVDA stock is shaping up as a battle between momentum and value.

NVDA P/E ratio

A look at the price-to-sales metric paints an even more euphoric picture of Nvidia’s valuation. The 11.6 ratio is 5.8 times that of the S&P 500 — and the S&P 500 is trading at a historically rich ratio.

NVDA stock is priced for perfection indeed.


Peer group analysis reaffirms the extreme valuation multiples for NVDA. On every metric — earnings, book, sales, cash flow and yield — Nvidia stock is trading at a huge premium to its peers, the market and also its own five-year averages.

nvda metrics

Many analysts are voicing valuation concerns as well. Brian Alger of Roth Capital Partners just lowered his rating to “Neutral” from “Buy” and gives the stock a price target of just $120 — while that’s a big upgrade from $95, it’s only a couple percent higher from here. BMO Capital Markets and Susquehanna also have “Neutral” ratings on NVDA stock with price targets well below Monday’s $117.31 closing price.

NVDA Stock Charts

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From a technical analysis perspective, NVDA stock is trading right at the all-time highs following an explosive 15% rally since bottoming on Jan. 18.

With earnings looming Thursday, it will be interesting to see how the stock reacts at such a critical juncture.

As I mentioned earlier, NVDA boils down to the classic momentum-versus-value argument. So far, the momentum camp has been the clear winner, with stock performance and valuations both reaching extremes.

In my previous post on Facebook Inc (NASDAQ:FB), I argued that it would take a huge beat to propel FB higher based on valuation. Facebook reported a big beat, yet the stock still fell.

Similarly with Nvidia, I think you could see a case of an earnings beat and a tepid reaction in NVDA stock.

Implied volatility (IV) is ridiculously cheap in front of earnings, trading at only 21% IV, so option buying strategies are favored.

How to Trade Nvidia Stock Here

Buy NVDA 10 Feb $132 puts and sell NVDA 10 Feb $130 puts for a 70 cents net debit. 

Maximum loss of the trade is $70 per spread with a maximum gain of $130 per spread. Return on risk is 185%.

Ideally, NVDA stock closes below $130 on expiration for the maximum gain.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

Article printed from InvestorPlace Media, https://investorplace.com/2017/02/short-nvidia-corporation-nvda-stock-q4-earnings/.

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