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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
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NVIDIA reports Q2 earnings November 15

Michael Fowlkes

11/10/2018 12:52 PM

What's Happening

Chip maker NVIDIA (NVDA) will report its third-quarter numbers after the market close November 15. Analysts expect earnings of $1.73, up from $1.33 during the same period last year. The stock is currently up 2.7% on the year.

Technical Analysis

NVDA was recently trading at $204.77 down $87.99 from its 12-month high and $28.76 above its 12-month low. InvestorsObserver’s Stock Score Report gives NVDA a 48 long-term technical score and a 24 short-term technical score. The stock has recent support above $175 and recent resistance below $210. Of the 24 analysts who cover the stock 15 rate it Strong Buy, 3 rate it Buy, 6 rate it Hold, 0 rate it Sell, and 0 rate it Strong Sell, NVDA gets a score of 50 from InvestorsObserver’s Stock Score Report.

Analyst's Thoughts

After an incredibly strong bull run that started in the summer of 2015, chip maker NVDA has finally started to cool off. The stock was at an all-time high as recently as the start of October, but as volatility hit the overall market in October NVDA really took a hit and the stock in now the lower end of 52-week range but remains modestly positive year to date. The recent drop in the stock has lowered NVDA’s valuation, but the forward P/E is still at 26 which is a bit high. The market has been willing to trade the stock at high valuations because of incredibly strong earnings growth, but as its comparables increase growth will slow. The stock is priced for perfection and the market will need to see a very strong quarterly report for that to continue. There is concern over the impact a trade war between the U.S. and China will have on chip demand and prices and any signs of weakness could result in a big drop in the stock. The street is expecting a beat of $0.07 with a whisper number of $1.80 and NVIDIA will need to report earnings close to that mark for the stock to regain the strong upward momentum it enjoyed the first half of the year. Even with the recent selloff analysts remain very bullish and continue to see a lot of upside potential. NVDA is now trading at $204.77 and the 24 analysts who cover the stock have an average price target of $291.54. A strong report will bring a lot of buyers back into the stock, but current shareholders should have an exit strategy in place just in case the numbers disappoint and the stock falls into negative territory for the year.

Stock Only Trade

If you're looking to establish a long stock position in NVDA consider buying the stock under $205. Sell if it falls below $189 or take profits if it gets to $236.

Bullish Trade

If you want a bullish hedged trade on the stock, consider a 12/21/18 145/150 bull-put credit spread for a $0.40 credit. That's a potential 8.7% return (76% annualized*) and the stock would have to fall 27% to cause a problem.

Bearish Trade

If you want to take a bearish stance on the stock at this time, consider an 12/21/18 255/260 bear-call credit spread for a $0.50 credit. That's a potential 11.1% return (96% annualized*) and the stock would have to rise 24.8% to cause a problem.

Covered Call Trade

If you like the stock but wish to lower your cost basis on a new position, you may want to consider a 12/21/18 $200 covered call. Buy NVDA shares (typically 100 shares, scale as appropriate), while selling the 12/21/18 $200 call for a debit of $184.37, per share. The trade has a target assigned return of 8.5%, and a target annualized return of 73% (for comparison purposes only).



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