Nvidia earnings will be the highlight of the week. Expectations are high and the options market is betting on a big move in either direction.
In a week that includes the publication of FOMC meeting minutes, speeches from seven Fed officials, and the release of PMI data, Nvidia’s earnings announcement may be the most anticipated event of all.
Given Nvidia's significant role in the technology sector and its influence on market trends, the significance of Wednesday’s earnings release is unsurprising. Nvidia stock price is up 46.6% so far in 2024, adding to its 238% gain in 2023. Nvidia is a poster child for the frenzy in artificial intelligence and demand for its AI chips has ballooned, with investors seeking strong revenue and profit numbers to justify the skyrocketing valuations.
Wall Street consensus for adjusted Q4 EPS is $4.60 a share, up more than 700% from 65 cents a year ago. Q4 revenue is expected to be $20.43 billion. A miss in earnings or lower forward guidance is likely to cause a wave of profit taking in the technology sector and drag the broader market with it. A stronger than expected report could add fuel to upward momentum and draw in more investors who are already experiencing some degree of FOMO from the stock’s dazzling performance.
Volatility surrounding earnings is not a new phenomenon for the company. Last February, the stock jumped 14% when it beat profit and revenue forecasts, and it soared 24% in May following another set of impressive results. Option markets are anticipating another potentially large move higher on Wednesday. This is evident in the high level of call skew. Call "skew" measures demand for high strike calls relative to at-the-money bullish bets. When skew rises, it means demand for high strike options is climbing relative to demand for options that would pay off if the stock were to see a smaller advance before expiration. Call skew is currently near a record high.
To put the level of implied volatility into context, consider Nvidia closed just above $725 per share as of the last trading session. Option straddles (which consist of a combination of a put and a call option) that expire on February 23rd, two days after the earnings announcement, cost roughly $80. In other words, a trader who wants to bet on a large move in the stock over the earnings release needs the stock to either rise above $805 or fall below $645 to break even on the trade. That is equivalent to an 11% swing in either direction - a huge expected move.
With a $1.8 trillion valuation, Nvidia is now the 3rd largest stock in the S&P 500 and the Nasdaq, recently surpassing Amazon and Google in market capitalization. An 11% move in the price of stock equates to more than $200 billion. The entire market cap of many large companies in the S&P 500, such as Disney, AT&T, Pfizer or IBM, is not over $200 billion. The anticipated change in market value through the earnings report for Nvidia is truly staggering.
Much of the stock market rally in the last year was driven by expectations around AI and the potential productivity that could be unlocked as its adoption becomes widespread. Nvidia's earnings and forward guidance could serve as a barometer for the AI movement and either confirm its lofty valuation or put a dent in its meteoric rise. Investors and market analysts are holding their breath, eagerly anticipating the announcement. The stakes are high, and the world is watching closely.
This article was written by Garth Friesen from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.