Nvidia Corporation (NASDAQ:NVDA) faces some hard questions when it steps into the earnings confessional in early November. The overall mood on Wall Street is extremely bullish toward NVDA stock, but most of that goodwill is predicated on growth that is already factored into the shares, including the growth of cryptocurrency mining.
But the current cryptocurrency boom for Nvidia GPUs won’t last forever. The company needs to show that it has just as impressive growth opportunities outside of this short-term boom in GPU sales, and it needs to do so sooner rather than later.
The problem for NVDA, and tech stocks in general, is that factors like artificial intelligence, self-driving cars, VR and the Internet of Things have already been priced into the shares. This has led to high valuations across the board, with Nvidia stock soaring more than 444% since the start of 2016.
Click to EnlargeNVDA and its peers need to start justifying those lofty valuations, or the sector will face another tech selloff like the one we saw on Sept. 25 — only next time, it will be a much, much deeper drop.
As for Nvidia, the company has yet to set an official date for earnings, but the report should arrive in the first full week of November. Currently, Wall Street is looking for a profit of 94 cents per share, up from 83 cents per share in the same quarter last year. Revenue is seen climbing 17.9% to $2.36 billion.
That’s some pretty solid growth, and if the company can top those numbers, even by a penny or two, it could allow the stock to continue its recent bull run higher.
According to Thomson/First Call, only 21 of the 38 analysts following NVDA stock rate it a “buy” or better, leaving room for potential upgrades. Meanwhile, the 12-month consensus price-target of $164.98 represents a significant discount to the stock’s current perch north of $180.
While there is room for price-target increases and upgrades, analysts appear to be taking a wait-and-see approach given the effect cryptocurrency miners have had on Nvidia stock.
Turning to its options configuration, speculative traders remain wary of the NVDA stock price. Currently, the October put/call open interest ratio rests at 0.93, with calls and puts in near parity. Peak call OI totals 8,500 contracts at the $185 strike, while peak put OI of 6,900 contracts also rests at the $185 strike.
Overall, November implieds are pricing in a potential post earnings move of about 12% for NVDA stock. This places the upper bound at $201, while the lower bound lies at $158. A drop below $170 would be painful for bulls, as it would place the shares below their 50-day moving average.
Meanwhile, a breakout above $200 seems unlikely unless Nvidia knocks its November earnings report out of the park.
Two Trades for NVDA Stock
Bull Call Spread: Traders looking for Nvidia to prove its valuation with its upcoming quarterly earnings report might want to consider a Nov $195/$200 bull call spread. At last check, this spread was offered at $1.25, or $125 per pair of contracts. Breakeven lies at $186.63, while a maximum profit of $3.75, or $375 per pair of contracts — a roughly 200% return — is possible if the NVDA price closes at or above $200 when November options expire.
Bear Put Spread: On the other hand, if Nvidia fails to live up to expectations, the downside risks are considerable. Traders looking to bet against the stock ahead of earnings might want to consider an Nov $160/$165 bear put spread. At last check, this spread was offered at $1.27, or $127 per pair of contracts. Breakeven lies at $163.73, while a maximum profit of $3.73, or $373 per pair of contracts — a roughly 194% return — is possible if the NVDA stock price closes at or below $160 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.