Nvidia Corporation (NASDAQ:NVDA) blew past earnings estimates on Tuesday, and that sent shares up nearly 18% on Wednesday to close at new all-time highs at $121.29. NVDA stock is doing even better today, jumping more than 5% to the $128 area.
However, the celebration in Nvidia shares is likely to come to a halt.
A quick look at the numbers: NVDA reported profits of 79 cents per share versus consensus of just 66 cents per share. Revenues also exceeded analyst estimates at $1.94 billion compared to expectations of $1.91 billion. Guidance of $1.95 billion in revenues for Q2 was strong, too.
NVDA stock has exploded as a result, but I think this is a case of too far, too fast, and I’m looking for shares to consolidate in the coming weeks.
In my previous post on Nvidia, I suggested that the stock would likely be range bound in front of earnings, which proved to be the case. In a similar fashion, I expect the stock to digest the recent move and chop around the critical $121 level before ultimately making the next big move higher or lower.
A quick look at the chart shows just how important that $121 price is for Nvidia stock.
Valuation concerns still loom, even given the earnings beat and solid guidance. While profits topped expectations by nearly 20%, NVDA stock rallied by a nearly like amount. This means the rich price-to-earnings ratio stayed virtually the same.
Mean estimates for 2018 earnings are $2.80 per share, putting the forward P/E for Nvidia at a rather robust 46. In fact, several analysts recently lowered their ratings on NVDA based on valuation. The mean analyst estimate for Nvidia stock currently stands at $120 per share … or almost exactly the price shares closed at on Wednesday.
Much of the hoopla surrounding NVDA stock centers around buzzwords like artificial intelligence and self-driving car technology. While both these initiatives certainly may or may not pan out years down the road, the truth remains that the core business of Nvidia remains and will remain high-end gaming for the foreseeable future.
With competition growing and growth slowing, I expect Nvidia may have trouble duplicating this quarter’s blow out numbers anytime soon.
To position for a period of consolidation in Nvidia, a short iron condor spread once again makes sense.
Trade Idea for NVDA Stock
Buy the Jun $110 puts and sell the Jun $115 puts; and buy the Jun $150 calls and sell the Jun $145 calls. The total credit on this trade is $1 or better.
The maximum gain on the trade is $100 per spread, with a maximum loss of $400 per spread. Return on risk is 25%.
The maximum gain will be realized if NVDA stock closes between the downside strike of $110 and the upside strike of $135 on June expiration.
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.
