Here’s How to Trade Nvidia Even Though It Has Tempered Expectations

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It’s a make or break week for Nvidia (NVDA) .

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

Last year, Huang talked up the firm’s Omniverse platform to include interactive AI avatars. The year prior, he introduced the Ampere chip architecture. This year, expectations are that the firm’s next generation chip architecture to be known as “Lovelace” will debut. This may be a tradable event for a stock that has been stuck in reverse for about 10 months now.

Reality

We know the company has tempered expectations. We know that the firm has already taken a $1.22B inventory resulted charge. At last check, the data center, which had already become a top reason to be in this name, continued growing, contributing $3.81B in revenue (+61%) to fiscal third quarter total revenue of $6.7B. Total revenues were only up 2.9%, as revenues derived from gaming decreased 33% to $2.04B.

With the recent changes made to the Ethereum blockchain making mining for that cryptocurrency an obsolete activity, do gaming revenue stay down here? Do gaming revenues only rebound mildly? The firm guided fiscal fourth (current) total revenues more than a cool $1B below Wall Street’s consensus at the time of that earnings release.

As for this quarter, Nvidia reports in late November, so not anytime soon. Consensus view is for adjusted EPS of $0.71 (GAAP EPS of roughly $0.41) on revenue of $5.85B. This compares to an adjusted EPS of $1.17 (GAAP EPS of $0.97) on revenue of $7.1B for the year ago comp.

Not Pretty, But…

Even with the tough quarter, free cash flow was positive. Unlevered free cash flow came to $525.9M. Yes, down big from the $2B+ for each of the previous three quarters, but Nvidia had seen numbers in that ballpark as recently as the May 2021 quarter. The balance sheet is rather strong. As of the end of July, Nvidia ran with a net cash position of $17.037B, and current assets of $27.418B. This included $3.889B in inventories. Current liabilities amounted to $7.573B. That’s a current ratio of 3.62 and a quick ratio of 3.11. Both ratios were down significantly from the previous quarter. Both are still spectacular.

Total assets add up to $43.476B, including $6.408B in “goodwill” and other intangibles. At 14.7% of total assets, I see nothing abusive. Total liabilities less equity came to $19.625B. This included long-term debt of $9.7B, which the firm could pay off in full out of pocket if need be.

Nvidia’s tangible book value of $17.443B and tangible book value per share of $7.01 both would have been at the firm’s highest level ever if not for the two prior quarters. What I am saying is fundamentally speaking, this firm is in great shape, even if the underlying business is going through a period of uncertainty.

Trend

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

However…

I do think that if a trader (and I likely do this myself) were to be able to purchase a small sized position in NVDA on weakness early on Monday, sub $130 would interest me, that this trader might be able to flip the stock out on Tuesday (post or during Huang’s address) for a profit and be completely out of the way before the Fed imposes any increased – from what already is – headline risk on the entire equity marketplace.

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