Alaric Securities celebrates at Nasdaq MarketSite
July 3, 2024 | Issue 69

NVIDIA Corporation Stock (NVDA): Is It Time to Sell

Nikolay Stoykov
Managing Partner at Alaric Securities
Close view of the NVIDA Corporation Logo

NVIDIA Corporation Stock has consistently attracted investors with its strong performance and innovations in the semiconductor industry. As a leader in GPUs and AI technologies, NVIDIA has set new standards in computing.

Examining NVDA’s stock performance amid changing market conditions provides key insights into technology trends and investment opportunities.

source: Hammer Trading Platform

We are sure you already know that NVDA has had an enviable performance, but nothing beats looking at the chart. If we had to use one word, that word would be incredible.

In-Depth Valuation Analysis

However, let’s dig deeper into the company and its valuation again, courtesy of finviz.com

Ok, so the stock is up 155% YTD and 18% during had to use one word the last month alone. While the current PE ratio is relatively high – nearly 73, the forward PE is around 35. Not bad at all. The company is expected to double its earnings in 2024 vs 2023 and increase earnings by nearly 50% annually for the next five years. There is a good reason why the stock has tripled in this year alone. The only concern is that the company lacks significant institutional ownership – only 66%.

As we discussed the use of institutional ownership to select the best stocks, it’s noteworthy that the absence of significant institutional ownership is the only major red flag when evaluating a company’s valuation..

Understanding NVDA’s Options Market

For those of you that don’t have experience in options – we have shown the graph of the 180-day implied volatility of NVDA listed options. Currently the options are pricing a standard deviation for that period equal to nearly 55% annually of the current price. This is quite a lot!

It is not uncommon to find option prices that high, what is unusual here, however, is that we are talking about the most valuable company in the world with market cap over 3 Bln USD!

For comparison, let’s look at the implied volatility of SMH, a semiconductor ETF.

The chart shows that SMH has implied much more normal volatility – only around 30% annually. Let’s compare the expected moves of NVDA and several other stocks and ETFs until December 2024 using their listed at-the-money option straddles.

Anticipated  Percentage Price Changes for NVIDIA and Other Stocks by December 2024 (ATM Straddles)

SPY – 8.1%, QQQ – 10.5 %, SMH – 17.7%, MSFT – 13% and NVDA – 30%!

As you can see, options market makers expect NVDA to be 4 times more volatile than SPY and nearly twice as volatile as most other large stocks like MSFT or even the entire semiconductor sector ETF. We take this fact to mean that investors are very split on the valuation of NVDA.

Bearish investors will not necessarily short the stock outright – very often they will buy long-dated out-of-the-money put options. And that nearly 100% premium in options versus most other stocks is not due to the fact that current PE ratio is very high. LLY is one of the most expensive current PE ratio stocks, ,cur—in fact,ent PE ratio is 150 and forward PE is 45.

Despite those lofty valuations, at-the-money straddle with expiry to January 2025 is trading at—in fact, only 15% of the stock price of LLY. Again, that is nearly half the price of that for NVDA.

Key Takeaway: Navigating NVDA’s Future

In conclusion – despite the impressive gains of NVDA in 2024, implied volatility of listed NVDA option is quite high. So high in fact that the premium is nearly double the volatility premium of many other tech companies like MSFT.

The important thing about implied volatility is that is it usually correct. And high implied volatility means large moves – up or down, are quite possible. We are keeping the weight of NVDA in any of our portfolios to less than 20% (its weight in SMH and QQQ ETF) and when possible – we sell exposure entirely.

We do not necessarily expect NVDA to drop 30%; it will just be very volatile. And a 30% drop should not come as a surprise – as a matter of fact that is the betting line based on listed options.

A correction and quite possibly, a sizable correction is expected by the options market makers. We surely will not disregard their warnings and reduce or sell entirely our NVDA exposure.

Disclaimer

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