Nvidia (NVDA) - Get Report is set to hit the street tonight with their third-quarter earnings release. Everyone has a take, so the action tonight should be interesting. When everyone has a take, you get a somewhat different response. It isn't so much as bearish or bullish when the numbers are released, but more of the right or wrong. I was right about X or wrong about Y. The first response in price is primarily emotional. Folks hate being wrong, so they will try to justify why they are still correct. That will often be something along the lines of declaring an overreaction in the stock price (if it goes contrary to their thesis). I've been guilty of this. Sometimes justifiably so and other times, well, we'll call them learning experiences.
This isn't meant to minimize the importance of your belief set, but be self-aware when it comes to your initial reaction. If the stock sells off and you immediately buy, ask yourself first if you are buying to try to boost the stock (you can't) and prove yourself right (you won't be) or if you are buying because your thesis is indeed supported by the results and not what you wanted the results to be.
I do feel there is a reason to be optimistic tonight. The reasons, the main reasons: data centers and e-sports.
We've heard from not only software gaming companies like Activision and Take-Two, but also Chinese streaming companies like Huya (HUYA) - Get Report and YY Inc. (YY) - Get Report . There's been enough net strength across the board to be optimistic. If we saw misses and terrible guidance across the board, then I'd be less optimistic, but the overall reports have been bullish for the gaming industry. I believe the Chinese government's restrictions of new games will create a pent-up demand for new gaming systems once they lift the ban. While that might not occur until early 2019, the market is forward-looking. The demand will come before the ban lift. That will be a plus for Nvidia.
If we steal anything in terms of data center business from one of a dozen names that have already reported it's this: business in the cloud is only getting better. More storage, faster data transfer, more powerful AI. That's the simplistic view. While Xilinx's (XLNX) - Get Report recent push may be because it is taking share from Intel (INTC) - Get Report in the data centers, it's important to note data center warehouse kings like Amazon (AMZN) - Get Report , Microsoft (MSFT) - Get Report , and Alphabet/Google (GOOGL) - Get Report are looking for anything to give them an edge. Plain, old Intel isn't cutting it. Over the next few years, I think we'll see names like Xilinx and Nvidia rise up to take the majority of the new business and legacy upgrades.
For those pointing to the continued drop in Bitcoin and other cryptocurrencies, let's remember that Nvidia already wrote off earnings from this segment as a big, fat zero. Anything that comes from crypto is an added bonus. One thing to realize about crypto is as price drops below mining costs, miners will need better efficiency to continue their process. Again, this will mean upgrades. Nvidia's new Turing Architecture may be a fit although Nvidia's primary income source will remain graphics with AI and data centers a strong number two.
Automotive will continue to boost the company as well. Recent results from NXP Semiconductors (NXPI) - Get Report should increase the optimism for Nvidia in the automotive space. Despite some recent setbacks in self-driving/autonomous vehicles as a whole, the path to viability continues to move ahead. Nvidia has multiple major partnerships, so expect to see a continued surge in growth.
The options market is pricing a move near 10% for the remainder of the week post-earnings. Nvidia has seen a move like that in more than six quarters. That's a year-and-a-half where the post-earnings move has remained in the single digits. For the most part, a 4-5% move has been the norm. Traders can generally do well following the direction of the open seeing a success rate of 66% over the past two years. While successes have outperformed failures, expectations should only be for a few percentage points profits. In other words, it's not very exciting and the risk-reward doesn't encourage me to get aggressively involved based simply on the opening direction. After day one, no discernible patterns have emerged over the past years.
This brings us back around to positioning. I would pursue Nvidia based on your fundamental view rather than a technical or patterned view. I do lean bullish, but with tempered expectations of a 4% to 5% post-earnings upside.
At the time of publication Collins was long YY and XLNX.
Jim Cramer and the AAP team hold positions in Amazon, Microsoft and Alphabet for their Action Alerts PLUS Charitable Trust Portfolio . Want to be alerted before Cramer buys or sells AMZN, MSFT or GOOGL? Learn more now.
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