Nvidia May Fail To Live Up To Its Pre-Earnings Hype

Summary:

• Nvidia is expected to report strong fiscal second quarter 2025 results, with earnings and revenue more than doubling from a year ago.
• Analysts anticipate high expectations for Nvidia’s guidance, with earnings and revenue growth projections for the fiscal third quarter of 2025.
• Implied volatility levels for Nvidia stock are high, with options dynamics indicating potential resistance at the $130 price level post-earnings.

Given its solid results and soaring stock price, Nvidia (NASDAQ:NVDA) has set a very high bar. That bar could be even higher this quarter because it seems increasingly difficult for the company to surprise investors.

Nvidia is expected to report fiscal second-quarter 2025 results on August 28th, and analysts expect another robust quarter for the company. Earnings and revenue are expected to more than double versus a year ago, to $0.65 per share on revenue of $28.7 billion.

Guidance will be critical because expectations are high, and the market has gotten used to big beats and even stronger guidance. For the fiscal third quarter of 2025, analysts expect earnings growth of 77% to $0.71 per share, on revenue growth of 75.4% to $31.8 billion.

Adjusted gross margins are also an important metric, and right now, analysts see fiscal second-quarter adjusted gross margins of 75.5% and 75% for the fiscal third quarter.

Shrinking Upside Surprises

The one thing that has been noticeable over the last few quarters is that beat rates have steadily declined. This means that the revenue that Nvidia is reporting is coming in closer to analysts’ estimates, meaning the upside surprise is shrinking.

Additionally, guidance surprises have also tapered off over the last four quarters. For instance, in the fiscal third quarter of 2024, guidance was 22% higher than analysts’ forecast, while guidance last quarter was just 8.5% higher than analysts’ estimates. This is a sign that analysts are starting to catch up to the company’s anticipated guidance, which sets the bar higher for each quarter and tougher to beat.

High Levels of Implied Volatility

The market seems a bit more uncertain about the company’s results this quarter and is pricing in a greater post-earnings move of about 9%. Based on its closing price of $129.37 on August 23, 2024, the stock could trade in a range of $117 to $141.

This results from very high implied volatility levels for options expiring on August 30. Currently, implied volatility for the $130 calls strike price is running around 100%, and implied volatility is likely to continue to rise as we approach the earnings date on August 28. This is also one reason why Nvidia stock has been unable to breach the $130 level in the past few trading sessions. The gamma level at $130 is very large, and these significant levels of option gamma often serve as support and resistance levels.

Options Dynamics

Many call deltas are built at the $130 price level, which is also currently helping to serve as resistance for the market. These delta and gamma levels are likely to grow larger as we head into Nvidia’s earnings due to the rising implied volatility levels. This means that options hedging flows to support the stock and help keep it around $130 in results.

However, the significant risk post results is what happens to that implied volatility. Because once the results are released and the event risk passes, the implied volatility will fall dramatically. Historically, implied volatility has been almost cut in half. Because of how option pricing works, once the implied volatility levels fall, both the premiums for puts and calls will drop dramatically, which will reduce the amount of delta and gamma in the market to serve as support and resistance. It will mean that market maker hedging flows will likely need to be reduced, since so much of the positioning currently is in the call options.

In fact, the current $130 call premium for expiration on August 30 is $6.82 per contract. That means that the stock needs to rise above $136.82 by August 30 for a new buyer of those calls to earn a profit, or roughly 6% from its price on Friday. However, if that implied volatility falls to 50%, the contract becomes worth just $3.61, and when adjusting for time value, the calls become worth just $2.00 per contract.

This means that if the stock doesn’t rise beyond $137 following results, at least based on the current market, the $130 calls will lose a ton of value following the release of the results, no matter how good or how bad the actual report is. That could result in a lot of hedging flows to come for sale. The setup last quarter was very similar, and what saved the stock that time was the 10-for-1 stock split, which helped to provide the fuel needed to push the stock higher.

Peak Growth

Additionally, it is clear that Nvidia has passed its peak revenue growth for this cycle, and historically, the stock’s price-to-sales ratio tends to expand and contract with the revenue growth rate. It isn’t to say that Nvidia’s stock will return to 5 or 6 times forward sales, but it does suggest that the current price-to-sales rate of 21 times over the last twelve months is probably due to come over the next several quarters.

Perhaps the multiple returns to something closer to a sales multiple of closer to 10, but if revenue grows as analysts suggest to around $225 billion, the stock could maintain a market cap close to that approximately $2 trillion region. But much of that will be determined by how fast sales grow in the future.

But at this point, the long-term fundamentals of the business probably do not matter much. What appears to matter much more, at least for now, is the momentum behind the stock and, more importantly, the options positioning around the stock. Based on current positioning, Nvidia will need to reverse its current trend and provide a bigger upside surprise on both actual revenue and its guidance to get the stock to the wall of resistance around $130 to $135.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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