NVIDIA earnings preview II

All eyes on NVDA reporting tomorrow morning (should listen to earnings call at 5am) and it has been 3 months since writing 1Q earnings attached.  NVDA seems to carry these type of premiums: AI hype, FOMO, bubble, crowdedness, growth, stocktwits, momentum & line of least resistance.  Equity risk premium of NVDA is the same as TSLA at 9.3% (vs credit spread at 4.4%) but its implied volatility is three times bigger heading into earnings.  NVDA’s coronavirus closing low on 16 March 2020 coincides with VIX’s top 82.69 and bitcoin’s 4,904 so correlation is there notwithstanding recent divergence with NVDA stock price comeback buy the rumour type of rally as it at one stage hit fresh record high $481.87 last night before it retraced down and some of the outrageous out of the money calls seem to have unwound given surging volatilities.  The stock price literally tripled this year which makes it second strongest since its quadruple return back in 2001. 

IMO based on above and mid PE ratio 98 times (between trailing 149 and forward 47) in the middle of current risk free rate of 4.3% or 23 times, a risk averse person would rather sell some prior (passive move) – already seen by last night’s price action of selling into close - or wait to buy post earnings regardless of the reaction even if it gaps up again tomorrow in postmarket to catch the tail of the comet as buying high isn’t a cardinal sin compared to selling low.  BTW risk reversal displays high demand on 15 delta ($533.61) and 10 delta calls ($556.88).  Also free cash flow estimates are wide open across analysts with lowest at $579m vs highest at $6.4b.

Macro backdrop

• Inflationary vs disinflationary – neither extremes seem to be present nor likely with Fed balance sheet (liquidity) still at $8.1t while declining
• Deflation vs reflation – reflation more realistic indicated by 2y inflation expectations look to bottom out and 2y real yield above 3% embedding some output with unemployment rate still pretty solid.
• GS Financial condition index nearing 100 indicating tightness and its correlation to S&P500 is -0.9 on weekly data over last two years

2Q

• Revenue estimate $11.04 billion (Bloomberg Consensus)
• Data center revenue estimate $7.98 billion
• Gaming revenue estimate $2.38 billion
• Professional Visualization revenue estimate $318.7 million
• Automotive revenue estimate $309.4 million
• Adjusted gross margin estimate 70.1%
• R&D expenses estimate $2.05 billion
• Adjusted operating expenses estimate $1.91 billion
• Adjusted operating income estimate $5.89 billion
• Adjusted EPS estimate $2.07
• Free cash flow estimate $3.95 billion

3Q

• Revenue estimate $12.51 billion
• Adjusted gross margin estimate 70.5%
• Adjusted operating expenses estimate $2.05 billion

2024 YEAR

• Revenue estimate $43.98 billion

Recent broker consensus target price

• MS – $500, Wedbush – $490, HSBC - $780, GS - $495, Aletheia Capital - $1,000 (street high), Punto Research - $222 (street low)

Key numbers

• 52 buys, 6 holds, 1 sell
• Avg PT $520.85 (12.2% upside from current price)
• Implied 1-day share move following earnings based on ATM implied volatility expiring 25 Aug: 7.9% equivalent to $35.86 meaning $420.82 downside & $492.54 upside
• Adjusted EPS beat estimates in 11 of past 12 quarters with 6/8 positive reactions from stock price
• Shares up 172.5% in past year vs SPX Index up 6.4%
• Quarter dividend BDVD est. 4.0c per share, year ago reported 4.0c; next declaration date Aug. 23, 2023 – indicated yield 0.04%