NVIDIA (NVDA) just reported earnings, and the stock is up nearly 7% after hours. I was a big fan of NVDA and began writing about it in 2015 when it was trading at under $20 per share. I lost interest in the stock in 2018, which happens to contain NVDA's top.
Earnings Report Sentiment Analysis
Since I last wrote about NVDA, I have developed a financial lexical analysis method, which I often apply to earnings reports. In this process, I can extract sentiment scores from earnings calls, and these scores' raw values, as well as quarterly/yearly changes, have predictive validity for a given stock's price in the following quarter/year. Today, I return to NVDA, employing this analysis.
Let's plot NVDA's sentiment scores with the stock's excess returns, relative to the NASDAQ index.
Last quarter (Q4, 2019)
This quarter (Q1, 2020)
Here, we see that sentiment score has predictive power for NVDA's ability to produce excess returns. The recent earnings report puts NVDA's management sentiment at slightly higher than average, thereby predicting excess returns over the coming quarter. Let's look at some of the forward-looking statements flagged in my analysis of this quarter's earnings.
These GPUs deliver up to 50% performance improvement over their Pascal based predecessors leveraging new Shader innovations such as concurrent floating point and integer operations, a unified cache and adaptive shading all with the incredibly power efficient architecture."
-This quarter saw the launch of multiple GPUs with the Turing microarchitecture, primarily focused on the gaming market. The GeForce GTX 1660 Ti, 1650, and 1660 represent a significant step forward for NVDA's unique selling proposition in this sector and should bear fruit in the coming quarters, especially with gaming laptops seeing increasing sales. Currently, Turing's growth is at a faster pace than Pascal, and should this trend continue, we could use Pascal growth as a floor for Turing's in the long-term.
GFN runs on NVIDIA's edge computing servers as telcos raise to offer the new services for their 5G networks, GFN is an ideal new 5G application."
-With the advent of 5G, NVDA is well-positioned via its GeForce Now cloud streaming service for gaming. This platform should bring tangible and sustainable revenue growth in the coming year when it launches as a subscription-based cost structure in South Korea (with LG) and Japan (with Softbank).
We unveiled a new RTX server configuration packing 40 GPUs into an 8-used space and up to 32 servers in a pod providing unparalleled density, efficiency and scalability... In the quarter, we announced our pending acquisition of Mellanox for $125 per share in cash representing a total enterprise value of approximately $6.9 billion, which we believe will strengthen our strategic position in data center."
-This quarter also saw a focus on NVDA's B2B business through its data center business. The RTX server will generate revenue from enterprises and is currently being deployed in Disney (DIS) and Pixar (acquired by Disney in 2006). Mellanox's (NASDAQ:MLNX) acquisition will solidify NVDA as the leader in cloud computing power, giving NVDA access to half of the world's top 500 supercomputers and, by proxy, making every company in the computer manufacturing and cloud industry a customer.
China looks like fine. I think China has stabilized. The gaming market in China is really vibrant and it continues to be vibrant."
-China's economic slowdown and its recent gaming bans (see below) have major concerns for investors in gaming tech. Management is optimistic on the China question, citing Tencent's (OTCPK:TCEHY) growth in the gaming sector and Epic Games opening shop in China. Management expects the gaming business in China to triple to the point where its market is three times the size of the population of the United States.
Some of the games that are banned or require changes before sales are allowed in China appear below. In addition, China has regularly placed bans on games and gamers over the past few years, as gaming explodes in China. Other examples are the midnight gaming ban on children from 2016 and a ceiling on online game releases in 2017, meant to prevent myopia.
(Source: Zhaizhou; note: I'm fluent in Chinese)
Now the reason why recently the inference activity has gotten just off the charts because of breakthroughs in what we call conversational AI."
-NVDA notes that its inference AI platform is seeing unexpected growth. This is probably due to advances in machine learning, creating demand where there was before skepticism. This should equate to progressive growth for NVDA's TensorRT, which was launched late last year.
We're doing great in China. There's a whole bunch of electric vehicles being created, the robot taxis developments around the world largely using NVIDIA technology."
-While this statement seems to be primarily about China, it is, in fact, inferring that NVDA's foray into the automotive industry is seeing initial success. This relates to last quarter's announcement of the Constellation platform, which allows the test-driving of thousands of automated vehicles in data centers for the purpose of "testing untestable scenarios." This is not a project strictly confined to China; NVDA is partnering with Toyota (TM) as well.
Accelerated computing and AI are the greatest forces in computing today and NVIDIA is leading these movements."
-NVDA sees itself as the leader of two industries with explosive growth. While some investors might disagree with this statement, the fact that NVDA is well-positioned in AI and cloud innovations will allow it to grow with these industries, even if they are not consistently stealing market share from competitors.
The data center spending pause around the world will likely persist in the second quarter and visibility remains low."
-Despite sentiment rising quarter-over-quarter, it is still lower year-over-year. One reason for this ding is an expectation of declining revenue from 2019 to 2020. NVDA cites macro concerns, such as a general suspension of spending in some of its key areas, including data centers. Another concern is the undersupply in CPUs, which will affect the company's laptop sales. Finally, management mentions that the oversupply in GPUs due to the cryptocurrency craze is still having effect on earnings:
The entire reason for Q4 and Q1 is attributed to oversupply in the channel as a result of cryptocurrency."
Overall, while revenue expectations have taken a hit, quarter-over-quarter growth expectations are still positive. Sentiment is higher than average and net positive. From a sentiment perspective, NVDA should see some excess returns over the coming quarter.
What's Next in the Chart?
As NVDA jumped overnight, we are expecting an up gap in the chart. Whether this is an area gap or breakaway gap will be important for investors questioning whether to add to their positions. I backtested up gaps led into by the current chart features on NVDA.
This post-earnings gap is best traded in the long direction. The price typically rises after this sort of gap, creating a breakaway gap, at least temporarily. Here is the result of buying the gap and selling two days after the gap:
(Source: Damon Verial; data from Yahoo Finance)
Trading these gaps consistently with a 2-day holding period produces an annual ROI of 15%. However, post-gap bullishness fades after 12 days on average. In short, we can expect NVDA to rise after earnings but pull back before resuming upward momentum.
Finally, a note on my price action analysis on NVDA: The smart money seems to be engaging in trend-following. The dumb money seems to be focused on taking profits, putting some downward pressure on NVDA's rallies. The best time to buy NVDA is on an up gap, such as the post-earnings gap. Buy at the open.
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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.