Nvidia's Bulls May Be Too Optimistic
Summary
- Options are pointing to a heightened level of volatility following results.
- The technical chart suggests the stock may drop to around $102.
- There is a very real chance guidance is weaker than expected.
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Nvidia (NASDAQ:NVDA) is set to report results on Thursday after the close, and the stakes couldn't be higher. Options are pricing in a massive amount of volatility following the stock's earnings release, with the potential for shares to rise or fall by over 12%. However, the technical chart is pointing to more losses in the weeks ahead.
Analysts have cut their forecast for the fiscal fourth quarter of 2019, but the significant risk will be the guidance the company gives for the fiscal first quarter. While those estimates have fallen, it isn't clear if the lowered expectations are enough.
Estimates Fall But Is It Enough
According to YCharts, analysts are looking for revenue of $2.4 billion in the first quarter and earnings of $0.99. That is down sharply from prior expectations of $3.3 billion in November, a drop of 27%. Since 2016, the fiscal first quarter has generally been the company’s weakest quarter for gaming revenue, its most significant contributor to sales.
Data by YCharts
AMD Paves The Way
AMD (AMD) reported on its conference call it is expecting sales to decline to $1.25 billion, a decline of 24% year over year. However, more importantly, it is a sequential decline of almost 12%. AMD noted in its conference call that the primary reason for the year-over-year decline in revenue is because of excess channel inventory for its graphics cards.
A similar type of decline in revenue for Nvidia in the first quarter would result in sales guidance of just $1.94 billion, much lower than the analysts' expectations. It may be naive to think that Nvidia could have a 12% sequential decline in sales just because AMD is expecting it. However, it isn't naive to believe that AMD's comments around excess inventory in the channel don't apply to Nvidia. Also given Nvidia's history of weaker first quarter gaming revenue, it isn't foolish to think that revenue guidance could very well come in below its fourth quarter revenue of around $2.2 billion.
Even if Nvidia guides revenue to $2.2 billion, the same as the fourth quarter, it will be nearly 7% below current analysts' consensus sales estimates. There is a genuine risk that Nvidia's revenue guidance will be worse than current estimates.
(Data From Nvidia)
Volatility Lays Ahead
The options market suggests that there is a great deal of uncertainty among investors heading into these results. The options for expiration on March 15 indicates the stock could rise or fall by 12% from the $145 strike price. It places the stock in a trading range of $127 to $162.
Weak Chart
The chart suggests the stock could be set to plunge following the results. A technical pattern known as a bear flag appears to be forming. It is a continuation pattern and suggests the stock falls to a new low, perhaps as far as $102, a drop of about 30% from its current price on February 11. Should that happen, it would allow the stock to refill a gap in the chart that was created in May 2017.
(Tradingview)
The relative strength index has also been trending lower since May 2017. It signals a very long-term bearish divergence, which occurs when a stock is rising, while the RSI is falling. The RSI currently suggests that the equity may be facing steeper declines.
Overall, the outlook for Nvidia looks shaky at best, with the genuine chance the stock's recent struggles are far from over. Just which way the stock will go from here hinges on what the company has to say and how strong or weak that first quarter guidance is.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
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