Readers will recall that in late August both Nvidia (NVDA) and Advanced Micro Devices (AMD) announced that their more advanced GPUs to include Nvidia's A100 chip had been added to the US Commerce Department's export control list.
That step alone made selling advanced chips to Chinese customers impossible without US government approval. The US government has been concerned that Beijing would put high-end US technological products to use in their military or in other areas where the US and China might have a competitive relationship. Then in October, the Biden Administration expanded the list of restrictions, adding defined hurdles to US semiconductor manufacturers to meet for products that could be sold to clients in China.
Reuters broke the news on Monday evening. Nvidia has launched a new GPU (graphics processing unit), the A800, which apparently went into production during the third quarter, and is being marketed as an alternative to the A100 for Chinese customers that according to a statement made by the firm... "meets the US government's clear test for reduced export control and cannot be programmed to exceed it."
The deal is this. Data centers rely on GPUs to handle tasks involving artificial intelligence and to process very large sets of data. The rules imposed on exports put for Nvidia hundred of millions of dollars worth of annual revenue at risk. This is their work-around.
I am long Nvidia, not huge, less than 1% of my most "hands-on" portfolio, after re-entering when I thought the air was out of the balloon. The stock went lower, so I added some more. The stock went higher. My average point of entry is currently $132 and change. Nvidia reports next week. This is that story.
Numbers
Nvidia is set to report the firm's third quarter financial results after the closing bell on Wednesday, November 16th. Currently a consensus of 31 sell-side analysts is for adjusted EPS of $0.71 within a range spanning from $0.61 to $0.78, GAAP EPS of $0.40, with whispers to the high side, and revenue of $5.8B, within a range spanning from $5.5B to $6B.
At consensus, these numbers would amount to adjusted earnings contraction of 39.3% on revenue contraction of 18.3%. All 31 analysts have reduced earnings expectations since the quarter started.
The stock is less expensive, trading at 31 times forward looking earnings than it was at the start of the year (48 times), but still is nowhere near being inexpensive. For comparison, AMD and Intel (INTC) both currently trade at 15 times. Looking back, free cash flow has remained positive, but is no longer beastly at $525.9M for the second quarter.
The balance sheet has been strong to very strong. As of the end of Q2, Nvidia's current ratio stood at 3.62, buoyed by a net cash position of $17.037B. Even with bloated inventories booked at a value of $3.889B, the firm's quick ratio rested at a beefy 3.11.
Simply put, the firm will be able to rough it for a couple of quarters if it has to, and I would expect to see further erosion in free cash flow and some further deterioration in the quality of a still strong balance sheet next week.
Insiders
I would have raised a flag of caution as a Director in the firm, Mark A. Stevens made two sales in October totaling $20.37M. Then I noticed a much smaller insider purchase ($722K) made around the same time. That purchase was made by President and CEO Jensen Huang. Huang exercised options granting a purchase price of $3.155 that were to expire in March 2023. Did Huang exercise those shares to increase his equity stake? Or to create cash? He has not sold them yet.
My Thoughts
Note that NVDA is poking its head out above the upper trendline of my Pitchfork model that has been in place since November 2021. That's coming up on a year. The stock took back its 21 day EMA and 50 day SMA in October. Let's zoom in...
Relative strength is improving, but is not yet overbought. The daily MACD sent bullish signals in late September and again at the bottom in mid-October. The 21 day EMA has crossed over above the 50 day SMA in what is known as a "swing-trader's" or mini-golden cross.
These are all positives. The stock appears to be building a cup pattern with a pivot of $192, which is a long way off, so I would expect the stock to tag a handle onto that cup at some point. This will create a new, probably lower pivot.
My feeling is that if the stock continues to perform well into earnings, then I will probably take some profits ahead of that event in order to protect myself.
I am interested in selling the $165 November 18th calls at a rough $1.50 covering at least part of the position. On the flip-side, the November 18th $125 puts look ripe for a sale at about $1.05. Might as well get paid to take on short-term risk at a strike price that I would be willing to add to my log at.
