As NVIDIA Corporation (NASDAQ:NVDA) heads towards Q4 2017 earnings, due on Feb 9th, short interest in NVIDIA stock has fallen sharply. Time to buy in?
NVIDIA Corporation (NASDAQ:NVDA) is scheduled to report its Q4 2017 earnings on Feb 9th. Understandably, expectations are high going into this earnings season, given the kind or returns NVDA stock has delivered over the last twelve months. With the momentum firmly behind it, NVIDIA stock has shaken off a slew of recent bearish calls, including the rather strongly negative call by Citron Research, and an earlier warning by Pacific Crest. And given the recent short interest data, the positive sentiment only seems to be growing stronger. Is it time to buy into NVIDIA stock?
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Short Interest In NVIDIA Stock Falls Sharply Ahead Of Q4 Earnings
As earnings day approaches, short interest has fallen sharply in NVDA stock. In fact, short interest is at its 52 week low. Based on data as of Jan 13th, which became available on the 25th of January, short interest in NVIDIA stock has fallen to 36.7 million shares. On the whole, that’s the lowest number we’ve seen in the last twelve months.
Even as a percentage of float, short interest is at its lowest in the last twelve months, at 8.56%, representing the first time in the last year that short interest as a percentage of float is in single digits. As a matter of fact, that number was at its 52 week high as recently as mid-December, when it touched 16.56%, nearly double the current number. So, clearly, there has been a rather sharp change in sentiment since then. And the fact that it comes after Nvidia’s massive run in 2016 seems rather encouraging.
Average trading volumes have also shot up, at over 24 million shares. This metric has nearly doubled, rising from about 13.8 million shares in December, also reflecting a marked uptick from 12.5 million shares in November and under 8 million shares in October 2016. As you’d expect, days to cover has fallen sharply to 1.5 days from as high as 8.5 days in October and over 5 days in mid-December.
NVIDIA Stock Has Shaken Off The Bearish Calls
Possibly the most bearish call on NVDA stock came from Citron Research, which pegged the stock’s fair value at $90, even as the stock was trading at nearly $120 a piece. We discussed each of Citron’s concerns in this detailed analysis of Nvidia, to find that some of the firm’s worries weren’t totally unfounded. However, after a rather brief correction, shares of Nvidia continued to move higher.
In another bearish/cautious call in December, Padific Crest’s Michael McConnell issued an early warning (1) about the potential trouble ahead for Nvidia. McConnell raised concerns about the rising inventory levels of GPUs, primarily high end GPUs made by NVIDIA Corporation (NASDAQ:NVDA), which had lead to weaker than expected pricing of these GPUs. Quoting from the post on Barron’s, McConnell said:
“Our specific findings were as follows: High-end NVIDIA GeForce GTX 1080 and 1070 card inventory levels have risen to 2 to 2.5 months in the channel versus targeted levels of 1 to 1.5 months due to weaker-than-expected sell-through in late October and November. Two weeks ago, desktop graphics card manufacturers began to experience order pushouts and cancellations of GTX 1080 and 1070 cards from channel customers ahead of the holiday season. Given the excess supply situation, GeForce GTX 1080 pricing has dropped ~10% in the channel“
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And as a result, McConnell was also apprehensive about the potential impact of these developments on Nvidia’s sales mix, and thus revenue, given that the problem was noticed by him largely with reference to higher end, higher ASP GPUs. We discussed some of McConnel’s concerns in more detail in this post on NVIDIA. Then there was also some talk about Intel’s upcoming third generation of Xeon Phi processors and how they could eliminate the need for GPUs (2) in deep learning or machine learning related applications. However, Nvidia has simply shrugged off all the negative sentiment to march back up to over $111 a share, where it closed the trading session on Friday.
Should You Buy NVDA Stock Now?
Clearly, it appears as if NVIDIA Corporation (NASDAQ:NVDA)’s dream run isn’t over yet, even after a near 280% rally in the last twelve months. The question is, should you buy into NVDA stock now? At its current PE of nearly 60 times trailing twelve months earnings, and with a price to sales ratio of nearly 10 times TTM revenue, NVDA stock is very expensive. Further, the stock is currently trading well above the analyst consensus price target of ~$100 a share.
So, even the slightest disappointment could lead to a post-earnings correction. In the long term, Nvidia comes across as a good opportunity to beat the market. To sum up, while there could be volatility in the short term, Nvidia stock looks like a good opportunity for long-term investors. For now, risk-averse investors might want to tread with caution and possibly limit their exposure to the stock, buying on dips. For those who are not averse to risk, NVDA stock may be a suitable investment option.
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The article The shorts are fleeing NVIDIA Corporation (NVDA) stock ahead of Q4 earnings originally appeared on amigobulls.com. Watch our analysis video on NVDA (3).
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