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Nvidia's Bulls May Be Too Optimistic

Feb. 11, 2019 1:08 PM ETNVIDIA Corporation (NVDA)AMD76 Comments


  • 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.

ChartData 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

This article was written by

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Designed for investors looking to stay ahead of the pack.

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. 

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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