Here’s how to trade Nvidia, even if it has tempered expectations

Here’s how to trade Nvidia, even if it has tempered expectations

It’s a breakout week for Nvidia (NVDA).

The company’s GTC Technology Conference kicks off Monday (today) and runs through this Thursday. The event is open to the general public. CEO Jensen Huang is expected to deliver the keynote address on Tuesday morning. Here Huang tends to introduce what is set to be Nvidia’s latest and greatest.

Last year, Huang talked about the company’s Omniverse platform to include interactive AI avatars. The previous year, it introduced the Ampere chip architecture. This year, expectations are that the company’s next-generation chip architecture known as “Lovelace” will make its debut. This may be a marketable event for a stock that has been stuck in reverse for about 10 months.

Reality

We know the company has tempered expectations. We know the company has already taken a $1.22 billion charge that came from the inventory. At last check, the data center, which had already become the top reason for being in that name, continued to grow, contributing $3.81 billion in revenue (+61%) to fiscal third-quarter total revenue of 6 .7 billion dollars. Total revenue rose only 2.9% as gaming revenue fell 33% to $2.04 billion.

With recent changes made to the Ethereum blockchain making mining for this cryptocurrency an obsolete activity, is gaming revenue here to stay? Is gaming revenue recovering slightly? The company guided for fiscal quarter (current) total revenue more than $1 billion below Wall Street’s consensus at the time of that earnings announcement.

As for this quarter, Nvidia is reporting in late November, so not soon. The consensus view is for adjusted EPS of $0.71 (GAAP EPS approx. $0.41) on revenue of $5.85 billion. This compares to an adjusted EPS of $1.17 (GAAP EPS of $0.97) on revenue of $7.1 billion for the prior year.

Not pretty, but…

Even with the difficult quarter, free cash flow was positive. Unlevered free cash flow was $525.9 million. Yes, well down from the $2 billion+ for each of the previous three quarters, but Nvidia had seen numbers in this ballpark as recently as the May 2021 quarter. The balance sheet is rather strong. As of the end of July, Nvidia was running with a net cash position of $17.037 billion and circulating assets of $27.418 billion. This included $3.889 billion in reserves. Current liabilities amounted to $7.573 billion. That’s a current ratio of 3.62 and a quick ratio of 3.11. Both indicators decreased significantly compared to the previous quarter. Both are still spectacular.

Total assets are $43.476 billion, including $6.408 billion in “goodwill” and other intangibles. At 14.7% of total assets I don’t see anything abusive. Total liabilities minus equity amounted to $19.625 billion. That included $9.7 billion in long-term debt, which the company could pay off entirely out of pocket if needed.

Nvidia’s tangible book value of $17.443 billion and tangible book value per share of $7.01 would both be the company’s highest ever if not for the previous two quarters. What I’m saying is basically, this company is in great shape, even if the underlying business is going through a period of uncertainty.

Trend

Shares are very close to being technically oversold. The daily MACD is in dire shape. The 21-day EMA, 50-day SMA, and 200-day SMA are all trending lower, which helps portfolio managers either out of name or at reduced exposure levels. I see no reason to invest in size in NVDA until NVDA shows me that my Pitchfork model dating back to November can no longer contain the stock’s range while the trends are lower.

However…

I think if a trader (and I probably do this myself) was able to buy a short position in NVDA on weakness early on Monday, below $130 I would be interested, that that trader might be able to flip the stock on Tuesday (after or during Huang’s speech) for profit and avoid altogether before the Fed imposes any increased – from what already exists – risk on the entire stock market.

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