NVDA Pre-earnings Analysis
Artificial intelligence has taken the market by a storm in 2023, leading companies like Nvidia to up more than 200% YTD, and moving its valuation to trade at a price to earnings ratio of 119, much higher than the average healthy ratio of 15. The astronomical valuation could be accredited to Nvidia’s ability to post substantial growth in revenue and earnings following the sharp increase in demand for artificial intelligence microchips. Analysts and markets are pricing the stock as if the growth will continue to grow at the same rate. This quarter, analysts are projecting Nvidia to post 3.03 in earnings per share, six times higher than same quarter last year when it posted .44 in EPS. Revenue is also expected to substantially grow, not only because of the demand in AI chips, but also because of the recent rise in cryptocurrency.
Option chain analysis:
The options market is very bullish on Nvidia in the short term with open interest significantly leaning to the bullish side, but implied volatility for this week’s options is already nearing 100% per contract. If we translate the IV to a dollar figure, we see that the market is expecting at least a $38 move from Nvidia to either side. If Nvidia doesn’t make at least that move, then all OTM options will be crushed to near zero. Our target on Nvidia is upwards of 600.00, but our timeline is longer. There is notable open interest on the 600C expiring 12/15/2023. This contract is currently at 2.95, an attractive price for the upward potential Nvidia has.