Tech juggernaut Nvidia (NASDAQ:NVDA) has been the toast of Wall Street. However, not everyone is buying into the bullish narrative, with short bets piling up ahead of the end of Friday’s NVDA stock split. Fundamentally, the underlying company’s diminishing returns regarding outright earnings performance against analysts’ expectations may represent a wrinkle to the story.
According to the latest data from S3 Partners, short trading dollar volume against NVDA stock has now reached $34.4 billion. MarketWatch points out that “Nvidia’s short exposure, by dollar value, is now nearly twice as much as what exists for the next two largest single-name equity shorts.” Those entities are Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA).
The news article also stated that shorting NVDA stock has been hazardous to speculators’ portfolios to the tune of $20 billion. Since the start of the year, shares have gained over 149%. Also, Reuters noted that “the short bets against Nvidia are equivalent to just 1% of its stock market value, according to LSEG data.”
Still, on a nominal basis, the magnitude of pessimistic wagers is impressive. S3 Partners Managing Director Ihor Dusaniwsky mentioned that NVDA stock is the “largest short in the U.S. market.”
Bearish Speculation Still Persists Against NVDA Stock Despite Success
To be sure, the actual percentages favor the bulls and the continued rise of NVDA stock. According to data from Fintel, the security’s short interest sits at 1.18% of the float. Further, the short interest ratio — the time it would take the bears to unwind their entire “negative” positions based on average trading volume — is minuscule at 1.37 days to cover.
However, investors may want to note the trend. Per official Nasdaq data provided by Fintel, the short interest of float back on Dec. 31, 2020 was 0.27%. It has since steadily risen to where it stands now.
Of course, that’s not to say that NVDA stock is a lock for downside. Presently, the short borrow fee rate for betting against shares is only 0.25%. That indicates a lack of relative demand for shorting Nvidia. Nevertheless, the bearish bet has some basis for rationality.
Looking at Yahoo Finance data, the magnitude of earnings surprises — that is, the percentage by which actual earnings per share exceeded (or slipped against) analysts’ consensus targets — has been declining sequentially.
For the quarter ended July 31, 2023, the earnings surprise stood at 29.2%. In the next quarter, it slipped to 19.3%, then 11.4%. In the most recent quarter for the period ended April 30, 2024, the surprise was 9.5%. That shows diminishing returns against an accelerating share price, which may explain some of the bearish bets against NVDA stock.
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.
