(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Nvidia Corp.'s (NVDA) stock has been one of the hardest hit stocks during the technology-led stock market sell-off since the beginning of October, down a stunning 35%. Now technical analysis suggests the stock may retest its previous lows around $176. Meanwhile, options trades indicate the stock could fall even lower by the middle of January, from its current price of around $189.
Nvidia stock has fallen below a critical technical support level at $198, after failing to rebound above technical resistance at $220, a bearish indication. Now the chart suggests the stock may fall back to its previous lows to $178, the next region of support, a decline of 6%. The relative strength index is also firmly moving lower, and it suggests that momentum is continuing to leave the stock.
The $190 put options for expiration on January 18 heavily outweigh the number of calls by a ratio of 6 to 1, with 6,000 open puts. A buyer of those puts would need the stock price to fall 10% to $171.30, which would be a new 52-week low. It is not a small bet either, the value of the open put position is roughly $11 million.
The company is forecast to have earnings growth of 44% on revenue growth of 23% when it reports results this Thursday. Full-year results are predicted to be even stronger, with earnings rising 62% on revenue growth of 33%.
Despite the strong growth in 2018, 2019 is expected to be very different, with earnings and revenue growth slowing materially. Analysts now see earnings growing by 9% down from prior estimates of 10% in September. Additionally, revenue is now forecast to increase by 13% down from previous forecasts of 14%.
Nvidia's valuation has fallen sharply with a fiscal 2020 PE ratio of 22. But that ratio reflects future growth, and for now, investors are clearly stating that may even still be too high given the steep decline in the stock over the past few weeks. Nvidia has the power to prove all the skeptics wrong, and should it deliver better than expected results later this week the stock may have a good shot at a big rebound.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.