History, Options, and Technicals Warn About Nvidia's Earnings: How to Leverage Retail Enthusiasm
2min read Nvidia is set to release its third-quarter fiscal 2025 results on Wednesday post-market. Following a 183% rally this year and sky-high demand for its flagship AI chips, Nvidia has become the second-largest public company worldwide. Options traders are currently betting on a $340 billion swing in shares for the post-earnings move. Despite the stock performing extremely well this year, history, options market, and technical indicators are flashing caution. Investors may consider hedging or exploring alternative investments to capture gains. Here's why.
Earnings Surprise Expected to be Lesser, Cooling Down AI Enthusiasm
Consensus projects Nvidia's revenue for the quarter ending October to be $33.28 billion, marking an 84% year-over-year increase and ending five consecutive quarters of triple-digit growth. Earnings per share are anticipated to be $0.70, representing an 89% year-over-year increase.
For the past seven quarters, Nvidia has consistently exceeded consensus estimates, delivering strong results driven by robust demand for AI chips. Particularly in the last four quarters, when AI demand for big tech surged, Nvidia's average revenue surprise was 8%, and EPS surprise was 11%. However, the magnitude of these surprises has been diminishing, with the August quarter revenue and EPS only beating by 4.5% and 6.3%, respectively. Analysts have become more accurate in their projections, or Nvidia's ability to deliver significant surprises has waned. Given the current AI mania, any failure by Nvidia to deliver substantial surprises could pose a problem.
The diminishing surprises have also impacted stock sentiment. Over the past three quarters, smaller surprises have led to less significant stock boosts. Even after stronger-than-expected Q2 FY25 results, the stock declined by more than 6% the following day. Overall, Nvidia's mania appears to be cooling down.
Option Market Insights
Despite the potential for lesser earnings surprises, options are still pricing in high volatility. Options pricing indicates that traders anticipate a move of around 9.8% in Nvidia's shares on Thursday, a day after it reports earnings. This is similar to the anticipation ahead of the August report and well above the 8.1% expected move over the last three years.
Notably, Nvidia at-the-money ($141) call options expiring this Friday show 115% implied volatility. This suggests that if earnings deliver less upside surprise but options remain significantly priced, it is illogical to expect a substantial post-earnings stock boost, making call options less attractive.
Since November 13, the options market has shown increased interest in NVDA's put options. The put/call (PCR) volume ratio for Monday reached 0.64, up from 0.41 on November 13. However, the bearish sentiment remains moderate compared to Nvidia's historical levels. Typically, a PCR below 0.7 is viewed as a strong bullish sentiment, indicating that traders still hold a moderately bullish outlook for Wednesday's earnings.
If Nvidia's earnings fail to deliver significant surprises or only slightly exceed expectations, the moderate bullish sentiment may exaggerate the sell-off, worsening the scenario. The last significant swing was on September 11, with an over 8% surge, followed by more substantial growth due to a better overall stock market. However, this time, the alpha may not play out favorably.
Technical Indicators Show Downside Risk
The chart below illustrates Nvidia's performance this year, with three down arrows noting the dates for each earnings announcement. For the first two earnings this year, the MA(5) was above MA(10) and MA(50), indicating a bullish momentum. However, during the last earnings, MA(50) was above MA(20), and MA(5) showed a downward trend, resulting in a 6% sell-off post-earnings. This time, although MA(5,10,20) are still in order, MA(5) is trending downward. If MA(5) breaks below MA(10), the sell-off could be more significant.
Similarly, Nvidia's current Relative Strength Index (RSI) stands above 50, indicating that the stock is neither overbought nor oversold, making a significant sell-off possible.
Conclusion
It may not be wise to gamble on Nvidia's earnings this time due to the potential for lesser surprises, high volatility expectations, and cautious technical indicators. Our base case is that Nvidia will deliver better-than-expected but not shocking earnings, which could neutralize the implied volatility for both calls and puts. However, if executives express caution, shares may come under pressure as mania cools and the current mild bullish sentiment fades. Selling calls or buying NVDA puts to hedge, or purchasing SPY-related index puts, may be prudent strategies. While Nvidia may disappoint traders, there is no doubt that AI is the future. A significant sell-off could present another buying opportunity.