Nvidia (NVDA, $13.00, up $0.74) is up 25% for the month despite reporting a lousy quarter. You know when the company CEO says their quarter was “disappointing” not too much good can come from that. However, it has.
Nvidia reported a 2Q loss of $121 million, or $0.22 a share, versus a profit of $173 million, or $0.29 a share, in the year-earlier period. Revenue came in at $893 million, down from $935 million. When you go from that big of a swing within a year, you can see why the stock has fallen from a 52-week high of nearly $40 to a low of $10. So why the recent bounce?
Although the company said it expects an increase in revenues and slightly higher gross margins in the coming quarters, it was the stock repurchase program that has bulls kirking. Nvidia upped its plans to buy back more of its stock by $1 billion and may purchase up to $3 billion of its stock in the future.
The company has a little over $1.5 billion in cash and said repurchases will be funded from working capital. They won’t be doing this all at once so it will take a year or two (or more) for the whole $3 billion. At current prices, that’s about 40% of the company’s market cap.
Nvidia is in the GPU business (graphics processing units) and makes chips that do cool things. The stock has seen its shares of ups and downs as you can tell from the chart. The company has even emerged from bankruptcy before. The business has been that volatile for Nvidia.
The earnings and buy-back news came Wednesday but on Thursday over 25,000 contracts of the September 12.50 calls (UVAIS, $1.28, up $0.44, or 50%) changed hands. It was 8x that of the September 12.50 puts (UVAUS, $0.70, down $0.30) which fell 30%.
It’s hard to go long with a company that is losing money and Nvidia just reported a loss of 22 cents. Yeah, that really makes you want to rush out and buy the stock or call options, right? I’m on the side of the fence that says the buy-back means nothing right now. It’s a nice gesture for management to say that but if you’re losing $125 mil a quarter, then you might want to hold off.
Nvidia has shown the ability to adapt in the past but when you step back and realize the company is losing money, it would be such a reach to hope for a quick turnaround. However, you have to respect the option action. For you diehard believers of the company, the January 20 2010 calls (KEVAD) are going for $4. That means the stock would have to be trading at $24 by January 2010, or post nearly a double from current levels for you just to break even on the options.
With competition coming from Intel (INTC, $24.36, up $0.24) and AMD Micro Devices (AMD, $5.30, up $0.15), it’s just too risky in my book. I’m not doing an apple to oranges comparision but the Intel January 25 2010 calls (WNLAE) are going for $3.70 which means Intel would have to be at $28.70 by the same time the Nvidia calls expire. I would much rather bet on Intel going from $24 to $29 than Nvidia jumping from $13 to $24.
I don’t have an “easy button” but the choice is clear. Don’t believe the hype with Nvidia, go witht the best in the industry, Intel.
Rick Rouse
Rick@OptionsMentoring.com
