Shares of Nvidia (NASDAQ:NVDA) certainly have fallen hard over the past month. NVDA stock fell over 17% after making a new all-time high at the $315 area in mid-February.
Undoubtedly much of the drop was due to the coronavirus fears and the effect it will have on earnings in the coming quarters. Signs of improvement, however, are finally beginning to emerge. Time to be a buyer of Nvidia near current levels.
The recent carnage in NVDA stock brought valuations and multiples down to a much more attractive level. Current P/E is now well under 40, a big drop from recent levels that exceeded 50. Other metrics, such as price/sales and price/book, have also come down sharply.
Undoubtedly earnings will likely suffer over the next few quarters given the coronavirus impact. Important to remember that interest rates have fallen dramatically to historic lows in the past month. This is hugely supportive of higher, not lower, valuation multiples.
Louis Navellier and the InvestorPlace Research Staff put together an excellent drill down on NVDA stock earlier this month. They highlighted the fact that half of the revenue for Nvidia comes from gaming. This should be an area that will continue to grow and is somewhat of a beneficiary of the shelter at home scenario evident in a large part of the country.
The report also brings to light to expanding role of Nvidia in the red hot 5G space. All in all, NVDA stock looks to be on the forefront of the ever changing technological landscape.
NVDA stock held critical support at the $180 level. MACD reached an extreme before strengthening. Bollinger Percent B (which is volatility adjusted) went negative before heading back into positive territory.
The previous two times these indicators aligned in a similar fashion marked significant lows in Nvidia shares. The inability for NVDA stock to make new lows, even with the overall market continuing to drop, is another encouraging sign. Sellers may finally be exhausted.
I had a bearish outlook in my previous analysis of NVDA from Feb. 21. Valuations were historically rich and the technicals were very overbought. That proved to be prescient, as NVDA stock suffered a severe set back (although I didn’t fathom a drop of this magnitude).
My outlook has now changed to bullish, because price does matter. Fundamentals and technicals both look attractive. Expect a rally over the coming weeks.
Implied volatility (IV) has softened somewhat recently but is still extremely high. This means option prices remain very expensive — which favors option selling strategies when constructing trades. The combination of a much cheaper stock with more expensive options sets up ideally for a covered call trade.
NVDA Stock Trade
Buy NVDA stock and sell the January 2021 $240 calls to hedge.
The net cost of the trade should be roughly $190. Selling the calls buffers the downside by premium received of $32, or about 14%. The $240 strike price also allows over 7% upside appreciation in NVDA stock before it will be called away. Ideally Nvidia closes above $240 at January expiration for a 20% return.
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 firstname.lastname@example.org.