Nvidia: Going To War With AMD And Apple

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About: NVIDIA Corporation (NVDA), Includes: AAPL, AMD, SNE
by: Damon Verial
Summary

Nvidia stock is overvalued from a fundamental perspective, but its metrics' trends are nevertheless bullish.

Nvidia has hinted at a new lineup of GPUs: The SUPER lineup, which has been leaked.

News will have a large impact on the future movements of NVDA stock as the company's wars between AMD and Apple heat up.

When we last discussed Nvidia (NVDA), I pointed to short-term bullishness after a gap and quarterly bullishness due to rising optimism on the part of management. Well, it turned out the gap was an area gap, and the slight rise in management sentiment – to levels slightly above average – has not helped NVDA rally.

Buy at the Support: Value Factors’ Hints

Now, NVDA sits slightly above its support level, at $147.50. This suggests a strong buy-in point, but I wanted to double check. Hence I have been digging around in my data on NVDA for the purpose of finding more support for the bullish position or red flags.

One factor that drew my concern was Nvidia's asset growth. Companies with large amounts of asset growth imply lower risk, as these companies both have the option to grow assets and engage in the choice to do so, thus they tend to underperform. Essentially, asset growth is seen as a safe buying signal, which drives up prices in the stock, leading to overvaluations.

Here is the state of Nvidia's asset growth:

(Source: Macrotrends)

However, asset growth alone does not predict underperformance. If operating profits outpaces asset growth, the statistical prediction is outperformance, excess returns. I calculated the ratio of operating profits to asset growth, plotting it so that we can see the trend:

(Source: Damon Verial; data from ADVFN)

This implies that Nvidia is managing its assets well. The negative aspect of growth in assets is outweighed by the company’s profitability. However, few would deny that NVDA is expensive, considering its 9.3x price-to-book ratio, relative to the industry average (2.5x) and market average (1.8x).

Another important value factor that has shown strong predictive performance is EBITDA/EV. NVDA’s is on the upswing, but the value is lower than we would like. The point value for this metric implies NVDA to be overvalued:

(Source: Damon Verial, data from ADVFN)

Thus, risk here seems to be higher than the reward. This helps explain the downside hedging in the options market. The money on puts outweighs that on calls more than 9:1.

Nvidia: A Glamour Stock

Investors in NVDA must understand that it's a glamour stock. Glamour stocks are notoriously overvalued and contain high amounts of risk. But such stocks also act like a lottery ticket in ways, qualitative factors in the company – factors that cannot be objectively priced into the stock – can justify the price.

While I agree that NVDA is overpriced, the company has many such factors, creating potential explosive rallies. Case-in-point: Nvidia's SUPER GPUs. Leaks fromNvidia show that its upcoming GPU lineup is likely to be a serious threat to Advanced Micro Devices (AMD), which just revealed Navi, its first GPU that gives the company a non-priced-based competitive potential in a fight with Nvidia. Nvidia will likely announce its SUPER series later this month, and the stock will almost certainly move on this news.

I backtested NVDA’s movements on novel information (e.g., news events). The pattern is interesting. Relative to good news, NVDA shows a dampened pattern: The good news is priced into the stock only partially, with upward drift afterward (the market incorporates the good news more slowly).

Bad news is also dampened in the same way: Investors are less likely to sell on bad news. On neutral or uncertain news, NVDA shows excess returns. This is the hype effect.

SUPER: Nvidia's Weapon in its AMD War

The SUPER announcement will likely be good news, judging by the leaks. But it's also uncertain, causing the stock to respond in “hype mode.” Regardless, this news-based pattern, with regard to SUPER, is bullish for the stock.

The leaks seem to be trustworthy. Nvidia is going to war with AMD, now that AMD has a (potentially) formidable GPU. And, in May, Nvidia hinted at the SUPER lineup:

(Source: Twitter)

Whether this new lineup can keep Nvidia on top of the GPU market remains to be seen. Regardless of the effectiveness of the SUPER lineup, the company seems to be increasingly given the cold shoulder in favor of AMD, and this certainly hurts the company’s bottom line, possibly pushing investors to AMD. Apple (NASDAQ:AAPL) is neglecting Nvidia, possibly resulting in self harm (Apple no longer supports Nvidia’s external CPUs, and customers hence prevented from updating their drivers; moreover, the iMac and Mac Mini GPUs are quite average and can bottleneck performance), and Sony (SNE) will be continuing with their use of AMD CPUs and GPUs for Playstation 5 – the platform has not employed an Nvidia GPU since Playstation 3.

GPU prices remain (ridiculously) high, despite the excess inventory, both factors created by the cryptocurrency craze. AMD is thus somewhat hedged by not being 100% exposed to the GPU economic trends. NVDA remains the higher risk/reward stock here.

Conclusion

News will likely have a large impact on NVDA’s future movements, as the Navi vs. (potentially) SUPER war begins. Notably, Nvidia will be fighting on two fronts, as Apple clearly wants a fight with Nvidia, too. This latter war is likely related to the aforementioned absurd GPU prices, but bad blood between Apple and Nvidia could last well after prices stabilize.

As news could push the stock further down, I suggest married puts for now:

Per one lot stock:

  1. Buy 1x Jun21 $145 put
  2. Roll over weekly, until the SUPER announcement.

Happy trading.

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.