Investment Alert: Buy STK 390 JAN 2024 PUTS (NVDA) Under $55/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
We’re not sure how smart it is to follow this alert because it’s going to seem downright foolish. But let’s take a swing at bat and risk the humiliation regardless. What are we talking about? Betting against Nvidia of course.
And for the sake of accuracy we’ll begin by saying that Nvidia is “only” a $972 billion stock at the time of writing. A few days ago it hit the trillion dollar club, though, hence the headline.
In our view, the valuation is absolutely ridiculous. But shorting it is as risky as buying it now it seems. So we’re going to do the next best thing. Let’s explain:
- Nvidia’s valuation is at a near all-time high, trading at 202.9x price-to-earnings ratio.
- The company’s forecasted fast growth from $25 billion in sales to $40 billion does not justify the steep premium.
- Puts offer a limited risk way of betting on an expected market correction that punishes Nvidia.
Sky High Valuation
Let’s start with facts that will highlight how totally nuts what’s going on with Nvidia is now. At the time of writing, Nvidia was trading at a 202.9x price-to-earnings ratio. For comparison, its peers are trading at an average 8.8x P/E ratio and the sector as a whole has a 12.7x multiple on earnings.
Bulls will argue that the company’s forecasted fast growth from $25 billion in sales and to $40 billion justify the steep premium. Maybe they’re right? But we don’t think so. After all, the company is already trading at 37x the last twelve months of sales versus 6.7x for its peers and 2.1x for the sector.
If Nvidia is the only hardware channel that all AI software will rely on to power the disruptive artificial intelligence trend then perhaps the justification exists for such sky high metrics.
But even then we think the exuberance will find a plateau soon, causing Nvidia to correct quite significantly at some point over the next 6 or 7 months. It’s for that reason we’re willing to take a bet against the stock.
The Bearish Play
Before going further, it’s at this point we should emphasize a disclaimer. Even though Nvidia may be in bubble territory, it can keep going. And we’re not keen to stand in the way of what might be a freight train that doesn’t stop. To do so would be to short the stock, and we think that’s too dangerous because in the last 6 months Nvidia has gone from the low $100s to $400+ per share. Shorting it opens up a portfolio to untold losses. What if the stock goes to $500 or $600 amid a frenzy?
We don’t want to play that risky game so we’re going to limit risk to $55 per share, and still bet bearish by purchasing the JAN 390 Strike Puts that are currently trading at $54.30 Ask price.
For full disclosure what we think will happen the market soon is a blowoff top followed by a pretty broad correction. Further, we believe there is not a whole lot of time left for the market to move up, but a long runway exists for the market fall.
The thesis for that expectation is two-fold. First, calls are flowing into big tech names still with fervor, and the underlying mechanics of markets could lead to a blow-off top. And secondly, a trillion dollars of liquidity is set to be pulled from risk assets before the end of August as new bonds are issued following the debt ceiling resolution. That should suck the proverbial air out of the markets, and trigger a correction. If true, the stocks that will get hit the most should be the ones trading at the most elevated premiums, and Nvidia is the poster child for that.
If we’re wrong, our risk is limited to the premium paid. If we’re right, the puts should gain in value not only from the market falling and taking Nvidia with it at an accelerated pace, but also from a spike in implied volatility at the time.