NVIDIA Shares Offer Upside But Diagonal Debit Spread Could Offset Volatility

NVIDIA Shares Offer Upside But Diagonal Debit Spread Could Offset Volatility

Semiconductor giant NVIDIA has lost over 10% since January

Supply chain constraints likely to persist, creating headwinds

Long-term investors could consider buying the dip, especially if shares decline toward $250

So far in 2022, investors in the semiconductor behemoth NVIDIA (NASDAQ: NVDA ) have not had much to celebrate. The stock has lost close to 10.3% since the start of the year and it has declined about 24.5% since it hit a record high of $346.47 in November 2021. Nvidia Weekly Chart. By comparison, the Philadelphia Semiconductor Index is down 17.1% year-to-date and competitors, Intel (NASDAQ: INTC ) and Advanced Micro Devices (NASDAQ: AMD ) are down 6.2% and 24.9% respectively, YTD. Recent Metrics

Deloitte highlights that the global semiconductor chip industry should “grow 10% in 2022 to over $600 billion.” With a market capitalization of $659.5 billion, NVIDIA is the most valuable semiconductor company.

Management released robust Q4 financials and FY 2022 metrics on Feb. 16. Results were better than consensus estimates.

Revenue was $7.6 billion, up from $5 billion a year ago. The Santa Clara, California-based semiconductor supplier generated $3.42 billion revenue from gaming, up 37% year-over-year. Data center top line was $3.26 billion, up 71%.

Meanwhile, the two other segments, i.e., professional visualization and automotive and robotics, generated revenues of $643 million and $125 million, respectively. It reported diluted EPS of $1.32 in the fourth quarter versus 78 cents per share a year ago.

Management currently expects to achieve revenue of $8.1 billion (plus or minus 2%) in Q1 FY23.

On the results, CFO Colette Kress commented: “ We had an excellent quarter with revenue up 53% year-on-year to $7.6 billion. We set records for total revenue as well as for gaming, data center and professional visualization. Full-year revenue was a record $26.9 billion, up 61%, compounding the prior year’s growth of 53%.” Prior to the release of Q4 results, NVDA stock was changing hands at around $263. As we write, shares are at $262.60. What To Expect From NVIDIA Stock

Among 42 analysts polled via Investing.com , NVDA stock has an “outperform” rating. Wall Street also has a 12-month median price target of $342.85 for the stock, implying an increase of more than 30% from current levels. The 12-month price range currently stands between $177.50 and $400. Consensus Estimates of Analysts Polled By Investing.com. Source: Investing.com

However, according to a number of valuation models , including P/E, P/S or terminal values, the average fair value at InvestingPro stands at $236.34. Valuation Models By InvestingPro. Source: InvestingPro

In other words, fundamental valuation suggests shares should roughly decline by 10%.

At present, NVDA’s P/E, P/B, and P/S ratios are 68.5x, 25.1x, and 24.8x. Comparable metrics for peers in the information technology sector stand at 25.6x, 8.7x, and 7.6x.

Our expectation is for the shares to trade in a wide range, between $230 and $270, to build a base in the coming weeks, and then they could potentially start a new leg up. Adding NVDA Stock To Portfolios

NVIDIA bulls, who believe the decline in the stock is likely to come to an end, could consider investing now. Their target price would be $342.85 or analysts’ forecast.

Although investors might want to buy NVDA stock for their long-term portfolios, they could also be nervous about further volatility in the coming weeks. Therefore, some might prefer to put together a “poor man’s covered call” on the stock instead.

So, today, we introduce a diagonal debit spread on NVIDIA by using LEAPS options, where both the profit potential and the risk are limited.

Most option strategies are not suitable for all retail investors. Therefore, the following discussion on NVDA stock is offered for educational purposes and not as an actual strategy to be followed by the average retail investor. Diagonal Debit Spread On NVDA Stock Price at time of writing: $262.60A trader first buys a longer term call with a lower strike price. At the same time, the trader sells a shorter term call with a higher strike price, creating a long diagonal spread.Thus, the call options for the underlying stock have different strikes and different expiration dates. The trader goes long one option and shorts the other to make a diagonal spread.Most traders entering such a strategy would be mildly bullish on the underlying security. Instead of buying 100 shares of NVDA, the trader would purchase a deep in the money LEAPS call option, where that LEAPS call acts as a “surrogate” for owning the stock.For the first leg of this strategy, the trader might buy a deep in […]

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