As if technology juggernaut Nvidia (NASDAQ:NVDA) needed any more good news, Susquehanna heaped onto the overwhelming optimism. Earlier Wednesday, the research arm of the quantitative trading firm expressed belief that the semiconductor stalwart should deliver strong results for its fourth-quarter earnings report, set to be released on Feb. 21. However, with so much anticipation baked into the bullish camp, NVDA stock is tempting the contrarian trade.
Susquehanna analysts led by Christopher Rolland increased their price target to $850 from $625. That’s well above the current average price target of $703.30, according to TipRanks. Notably, the new price estimate matches the previous high set in the month by UBS analyst Timothy Arcuri. Rolland laid out the optimistic view, which naturally included artificial intelligence:
“We expect better results/guidance as checks around [data center] GPUs (long LTs and high aftermarket pricing) are solid. For Data Center (now [more than] 80% of revenue), AI demand remains strong, helped by better hyperscale capex guidance and recent commentary from Meta and Tesla suggesting continued strong GPU purchases. While some worried about an air pocket ahead of B100 [a next-generation graphics processor], we think this seems increasingly less likely, although we note the possibility of slowing growth in 3Q in front of this year-end ramp.”
Looking ahead near term, a consensus of analysts estimate that Nvidia will report Q4 earnings of $4.56 per share on $20.33 billion in revenue, per Seeking Alpha.
Justification but Also Anxieties Surround the Hype of NVDA Stock
While NVDA stock may appear a heavily hyped investment idea, Rolland notes fundamental justifications for the bullishness. For example, the ramp-up of Nvidia’s H100 graphics processing unit — the company’s flagship GPU — likely involved the tech juggernaut’s largest customers. Additionally, a “long-tail list” of customers that have not received ample supply provide confidence regarding Q1 guidance.
Leaning on Nvidia’s expressed confidence that supply will increase each quarter through the year, Rolland’s price target upgrade for NVDA stock appears reasonable. As well, Nvidia reportedly signed a deal with Japanese tech conglomerate SoftBank (OTCMKTS:SFTBY) to create an industry group for global standards for AI processing, per Seeking Alpha.
While NVDA stock has plenty of elements moving in its favor, it also attracted bearish sentiment. According to Fintel’s options flow screener — which exclusively filters for big block transactions likely made by institutions — high volume for bought puts and sold calls materialized. Specifically, a Feb. 13 transaction for 1,005 contracts sold of the NVDA June 21, 2024 $550 call — resulting in a premium collection of $6.23 million — warrants closer examination.
Further, looking at Barchart’s unusual options activity screener, two transactions stand out:
- NVDA June 21, 2024, $725 call priced at $90.
- NVDA June 21, 2024, $725 put priced at $80.
For the same strike price ($725) and expiration date (June 21), the call option features a 12.5% premium over the put. As the risk-reward begins to tilt toward the bearish side of the spectrum, contrarian traders may take the cheaper offerings. This dynamic likely makes the options market makers — the oddsmakers of NVDA — quite nervous.
Why It Matters
Indeed, according to Fintel, the gamma exposure for NVDA stock options stands at a whopping $659 million per every 1% move. As NVDA rises, the underlying delta exposure becomes more positive. But because market makers must take the opposite-side wager, they’re also selling the calls that the Nvidia bulls are buying. Without proper risk management strategies, volatility in NVDA may lead to severe losses.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
