“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, November 26, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – NVIDIA Corporation (NASDAQ:NVDA) Calls

Monday November 26, 2018

** OPTION TRADE: Buy the NVDA FEB 15 2019 155.000 CALL at approximately $12.00. Place a pre-determined sell at $24.00.

Also include a protective stop loss of $4.80.

The maker of graphics and high-performance computing chips NVIDIA Corporation (NASDAQ:NVDA) had a very disappointing result for third-quarter 2019; suffering from a lack of interest in cryptocurrency mining tools which left the shipping channels overstuffed with unsold graphics cards. The company beat its own earnings guidance despite falling short of management's revenue projections.

For further insight on this read…..”Nvidia Update - Bottom Reached??

Nvidia was ready to rally to $400 on AI and data-related tailwinds. Now, one cryptocurrency plagued quarter later, Nvidia stock is trading down at $140 and no one wants to buy it.

And now, this is the time to be in before it makes its climb back upwards!

And it seems that the short-seller Citron Research agrees; even though he has been a vocal bear on Nvidia stock for the past several years, turned bullish on NVDA after the recent correction. In a tweet on November 20, Citron said they have bought the dip in Nvidia stock, and are expecting the company to “eat through inventory issue” and rally to $165.

It is important to heed this reversal by Citron….

The last two times Citron has publicly announced a big reversal on a stock (Tesla (NASDAQ:TSLA) in October and Roku (NASDAQ:ROKU) in May), that stock proceeded to rally in a big way over the subsequent several months.

About Nvidia…..

NVIDIA Corporation operates as a visual computing company worldwide. It operates through two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming and mainstream PCs; GeForce NOW for cloud-based game-streaming service; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for AI utilizing deep learning, accelerated computing, and general purpose computing; GRID provides power of NVIDIA graphics through the cloud and datacenters; DGX for AI scientists, researchers, and developers; and cryptocurrency-specific graphics processing units.

Past Performance…..

Nvidia reported record revenues of $9.71 billion in its FY18 annual report, up 41% from $6.91 billion a year before. That growth can be credited in large part to the company's expansion in the GPU industry. In fiscal 2018, Nvidia added 34 GPU-accelerated systems to the Top 500 Supercomputer List, bringing the company's total to 87. One of the company's most popular GPU products, "Nvidia GeForce," is usually integrated with laptops, PCs, and virtual reality processors. Other products driving the growth of the segment include Quadro, Tesla and GRID.

The second-largest reportable segment for Nvidia Corporation is Tegra, which combines a GPU and a CPU into one chip. The product is designed to support online gaming, entertainment devices, drones, artificial intelligence, and — most importantly — self-driving cars. Early in 2015, Nvidia announced a partnership with ride-hailing company Uber, who was looking to expand into the autonomous vehicle sector. The company first began to launch city trials in Pittsburgh, Pennsylvania in the fall of 2016 and launched a second pilot program in Phoenix, Arizona in early 2017, logging more than 2 million autonomous miles in that time. In fall 2016, Nvidia also announced that the Tegra processor would be used in all Tesla Motors (TSLA) vehicles. In fiscal 2018, Nvidia announced that it had expanded its hold over the autonomous vehicle sector by developing NVIDIA DRIVE, the world's first functionally-safe self-driving platform.

As of January 2018, Tegra generates only an eighth of total company sales, but the segment provides a solid starting point for Nvidia Corporation to expand into the growing autonomous vehicles industry.

Future Earnings…..

Brokerages forecast that NVIDIA will post sales of $2.70 billion for the current fiscal quarter. NVIDIA reported sales of $2.91 billion in the same quarter last year, which would suggest a negative year over year growth rate of 7.2%. The business is expected to announce its next quarterly earnings report on Thursday, February 14th.

Moving Forward…..

NVIDIA hopes to have worked through the industry's excess inventories by the end of the fourth quarter, setting the stage for renewed growth in calendar year 2019 and beyond. Next-generation games such as Electronic Arts ' Battlefield 5 support the Turing chips' new ray tracing functions out of the box, perhaps paving the way toward another wave of system upgrades in the gaming enthusiast market.

But the slowdown over the holidays is another problem yet to be encountered! Fourth-quarter revenues are expected to stop near $2.7 billion; roughly 7% below the year-ago period's result. And GAAP earnings will be approximately $1.16 per share; which would be 35% below the $1.78 per share that was reported in the fourth quarter of fiscal year 2018.

Influencing Factors…..

Despite the recent selloff, the fundamentals underlying Nvidia stock remain exceptionally favorable in a long term window.

In a nutshell, the recent correction in Nvidia stock can be attributed to the cryptocurrency mining boom ending, and that big pop creating an inventory problem for the company which will take one to two quarters to work through.

But, nothing about this recent selloff changes the long term growth narrative supporting Nvidia stock.

The growth market businesses, like AI, IoT and data centers, continue to do quite well. In Q3, the data center, pro visualization, and automotive businesses all reported record revenues. The data center business grew by nearly 60% year-over-year. The pro visualization business was up nearly 30%. The automotive business was up nearly 20%.

These businesses won’t stop growing any time soon. The common threads among these businesses are the increasing investment in and deployment of AI technologies, as well as the increasing investment in and utilization of data. These two trends aren’t reversing course any time soon. AI is still in the early innings of dramatically changing multiple industries around the world, while data is only growing in volume and importance.

NVIDIA's graphics processors are in a league of their own when it comes to processing visual information, which gives it an edge over its rivals in the AI space. And the demand for such GPUs is growing rapidly: In the data center server market alone, the company's management thinks its total addressable market will hit is $50 billion by 2023.

NVIDIA's chips sit at the heart of many other types of AI systems as well, including (as mentioned above) in autonomous vehicles. Already, 370 companies are using its AI driverless car platform, called Drive PX Pegasus, and the company believes its autonomous driving market opportunity will be $60 billion by 2035.

NVDA's GPUs aren't really commodity-based goods. Many chip makers are really just competing on price with other chip makers, so margins are low and it's all about volume.

NVDA delivers unique products that allow newer technologies to be exploited by consumers and professionals alike. Because of this, it can charge a premium for its products. And people are happy to pay the premiums.

As such, the long-term growth drivers supporting Nvidia stock are unaffected by this recent selloff. Instead, you have a bunch of near term noise thanks to crypto-related inventory issues, and that near term noise is drowning out healthy long term growth prospects. In such situations, the wise move is usually to ignore the most recent headlines, see the forest through the trees, and buy the dip with a long-term horizon.

Analysts Opinions

Several equities analysts have recently commented on the company…..

  • Goldman Sachs Group increased their target price on shares of NVIDIA from $310.00 to $324.00 and gave the company a “buy” rating in a research report on Tuesday, August 7th.
  • BidaskClub raised shares of NVIDIA from a “buy” rating to a “strong-buy” rating in a research report on Friday, August 10th.
  • Benchmark reissued a “buy” rating and set a $310.00 price target (up from $280.00) on shares of NVIDIA in a research note on Thursday, September 20th.
  • Needham & Company LLC lifted their price target on NVIDIA from $325.00 to $350.00 and gave the company a “buy” rating in a research note on Friday, September 14th.
  • Tigress Financial reissued a “buy” rating on shares of NVIDIA in a research note on Friday, October 5th.
  • Finally, Evercore ISI lifted their price objective on NVIDIA from $300.00 to $400.00 and gave the stock an “outperform” rating in a research note on Friday, September 28th.

Four analysts have rated the stock with a sell rating, seven have issued a hold rating and twenty-five have issued a buy rating to the stock. NVIDIA presently has an average rating of “Buy” and an average target price of $261.28.

Summary

Fundamentals are important here, as Nvidia stock was trading up near $300 because of growth tailwinds in AI and data-related markets.

The cryptocurrency hype was more of a footnote. But, now that this hype is gone, investors are freaking out and selling the stock to multi-year lows. That doesn’t make much sense. The AI and data-related tailwinds remain as robust as ever.

Thus, you have a situation of near-term panic clouding what is still a very promising long-term growth narrative. In those situations, buying the dip is usually the prescient move. As such, buying the dip in Nvidia stock seems appropriate.

NVDA opened at $145.00 on Monday. The company has a market cap of $88.45 billion, a price-to-earnings ratio of 21.04, a PEG ratio of 2.11 and a beta of 2.01. The company has a debt-to-equity ratio of 0.21, a current ratio of 7.08 and a quick ratio of 6.20. NVIDIA has a fifty-two week low of $133.31 and a fifty-two week high of $292.76.