NVIDIA is arguably one of the most important companies in the tech world, particularly the global economy. It rates right up there with Alphabet and Microsoft.
When the Personal Computer was first introduced, the computer monitor was driven by the CPU (Central Processing Unit). The quality of the display was not very good. The industry created the GPU (Graphics Processing Unit) to improve the speed and definition of monitors. NVIDIA was and still is a leader in this area. GPUs are number crunchers as each pixel on the monitor concerning its location and color is a number. The larger and higher quality of the monitor, the more numbers are processed.
Games require screens to redraw quickly to make the images and their movement look realistic and seamless. To respond to this demand, GPU needed to be as fast as possible. Games are a big industry, and NVIDIA is a dominant player. AMD is NVIDIA’s primary competitor, and Apple has stepped into the fray with their new ARM-based microprocessors that combine CPUs & GPUs onto the same chip.
Given their ability to crunch numbers, GPUs were a dominant force in cryptocurrency mining. ASIC (Application Specific Integrated Circuits) has largely taken over that function. GPUs are still used for some mining operations, but now that ETH has switched to Proof of Stake, eliminating the need for intense computation, that business has shrunk. Don’t shed a tear for NVIDIA and AMD. They have turned their focus to virtual reality and artificial intelligence. These two burgeoning industries have excited investors with the business opportunities these industries represent.
That enthusiasm is not lost on NVIDIA’s share price. As you can see on the chart, it ripped higher during the C19 lockdown as people bought new computers with high-quality graphics capabilities as they, worked from home and communicated with colleagues and customers through video. Unnoted by most investors, the price shot up above the NASDAQ bubble valuation. When interest rates started to rise, the share price plummeted. But once people realized that the economy would be ok, the share price found a bottom and rose once again. Now that ChatGPT and other AI applications are hitting the mainstream for individuals, investors have taken the share price up to all-time highs, once again exceeding NASDAQ bubble highs. Interestingly, the share price has hot broken above the 2021 highs, but valuation, as measured by the PE ratio, has broken above it.
NVIDIA is moving to be the number 1 provider of AI computation devices. Their latest offering is the H100 chip. The A100 has become the “workhorse” for artificial intelligence professionals and goes for the lofty price of $10,000. The company will report earnings on Wednesday, the 24th. People will be watching the sales figure for this new chip A1o0.
The company just announced a new venture with Services Now to bring AI to their enterprise services platform. This may be a new source of growth for both companies. Time will tell if they can work well together. As best we can tell, these companies have grown independently of other organizations. JVs do not work at times if incentives grow to conflict over time.
Analysts expect the company to report a profit of $0.92 a share for the quarter ending April 2023. We suspect the company will meet or exceed this expectation as it does not represent any growth versus the last quarter, and it is down a bit from the same quarter of 2022. We have concerns about the company’s ability to meet expectations of $30.3 billion in revenue producing $4.58 per share for the entire year of 2023. That would be a 12% growth in revenue and a 130% growth in earnings. Expectations are pretty high.
So how are investors pricing the uncertainty of the price action offered by the earnings announcement? We determine this by looking at the cost of a straddle with the strikes as close to the money and a time to expiration as close to the event date as possible. Options traders expect the share price to rise or fall $22.33 or 7.1% over the week. So expect a volatile move on the earnings announcement.
So how should one trade it if they were so inclined? Our analysis of the historical valuation, as measured by the PE ratio, suggests that a top might be at hand. But a shorter-term chart shows there may be more upside to go. The chart below shows the stock’s price action for the past five years. It indicates that the stock price is extended, but there is still a bit of room to the upside.
Our current working thesis suggests that NVDIA’s share price will rise after the earnings announcement. It could trade up to the 2021 high of $350 and run into resistance. Investors who bought at the old high will likely be sellers as they hope to break even and then deploy their capital in opportunities with more traditional valuations.
Net-net, we are inclined to watch the earnings announcement from the sidelines. If the price pops to the $350 area, sell a call spread with a wide strike spread (at least $10). The option premium is likely to be high, so one should get a good price for selling the spread.
