(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Nvidia Corp. (NVDA) shares have gone straight up since breaking out September 15, surging nearly 10 percent higher to about $187. But technical analysis suggests there could be at least a 10 percent downside from current levels. The options market is pricing in a 20 percent move in the stock, while declining revenue and earnings growth rates could begin to compress multiples, pressuring the stock even further.
In an Investopedia article from September 15, we noted that Nvidia shares had broken out with the potential to increase to the $200 level. (See more: Nvidia’s Stock May Have Just Broken Out.) However, technical reading suggests the stock is topping out at around $190.
Options are pricing in a massive 20 percent move in Nvidia shares based on a long straddle set to expire on January 19, 2018. Additionally, year-over-year revenue growth is expected to fall for the fiscal ending October 31, 2017, to roughly 17.5 percent, from the mid-50 percent in the four prior quarters.
Wall Of Sellers
A technical reading of the chart suggests the stock could first fall back to $170, or about 10 percent from its current trading level of $187. In the 5-min chart below, we can see the bulls failed to push the stock much beyond $190 after jumping higher on strong volume. However, since then, volume has been slowly falling, suggesting the bulls are running out the buyers needed to take the stock beyond $190.
Massive Volatility Pricing In
The options market is pricing in a massive move in the stock as well, with implied volatility approaching 40 percent for expiration on January 19, 2018. By comparison, the S&P 500 has an implied volatility of only 10 percent for the same expiration month.
The $190 long straddle, a strategy involving buying both the put and call, suggests a move in the stock of nearly 19 percent. This means a buyer of both the put and call would need the stock to either rise to about $224 or fall to $153.50 to break even.
(Provided by Interactive Brokers)
The final piece to consider is just how much year-over-year revenue and earnings growth will decline in the coming quarters. When the company starts reporting results for the fiscal period ending October 31, the year-over-year growth rates are expected to fall significantly. Falling growth rates could weigh heavily on the stock, compressing the earnings multiple.
With the stock showing year-over-year growth in the mid-50s, it seemed relatively easy to justify paying multiples of earnings in the 40s. But when those growth rates come down to the low double-digits, suddenly, paying 40 times becomes very expensive.
Nvidia shares are apparently failing to push higher at the $190 level. An options market that is pricing in elevated levels of volatility, coupled with the potential for multiple compression, is likely to be a significant headwind for the stock price.
But then again, this is Nvidia. There have been many traders that have shorted this name, only to have their heads handed back to them later.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
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