I had doubled my NVDA position recently. Sold puts. Bought leaps. I agree that the cryptocurrency related sales did the opposite of masking growth. It made us believe that it was growing faster than it is. The hen has now come home to roost. So the growth rate is not what we thought and now we must recalibrate to that.
I like NVDA long term. There are too many verticals that it is dominating and will dominate, and, yes, these verticals are small but they will one day be big. Not in 2019 but in 2021 or beyond. I think that gaming will reaccelerate and the number of gamers continues to grow. So long term NVDA is a winner IMO.
So what to do. Looking long term, I like it. Looking at the multiple, I like it. The buybacks at these prices will be nice. However, I ask myself will the stock go up faster than my alternatives in the next few months to 6 months? IMO, there isn’t a catalyst until Feb 14 when they report earnings again. Now that management knows what has happened, they will not miss again. They will exceed guidance but will that be good enough? And what will the guidance be on 2/14? What is the next catalyst after 2/14. GTC is in March and there will be new announcements. On a side note: what does the realization of a glut on NVDA’s GPUs mean for AMD’s GPU business? This cannot be good for AMD when it must compete against NVDA’s n-1 generation chip. Also, will we be looking at any inventory write down on NVDA’s large inventory?
So what do I do? with my stock? with my leaps? with my short puts? I do need capital losses to offset the realized gains that I have so far in 2019. I will take the loss on the short puts and switch to another horse for my short put strategy, a stock or stocks that has/have near term catalysts. My shares (if I only sell some) I can’t sell until the end of the month or I would not be able to take the loss (wash sale). I will not sell all my shares but will sell my high cost basis shares to reduce my 2018 tax bill. I will reduce my allocation, and I will keep some shares. I think I will keep the leaps (they are 2021 calls).
Did I make a mistake? Well, the growth rate of the true underlying business (i.e. without crypto) was lower than we thought due to crypto. Everyone said and I said that crypto was not important for NVDA’s long term growth. This was true and still is true. But crypto made growth seem higher and it caused NVDA management (who also didn’t see how much of an impact crypto was having on GPU sales) to overestimate demand and build too much inventory. So now there’s a glut of a previous generation product. So I didn’t see it and Jensen didn’t see and Colette didn’t see it. Now it’s clear. We now also have 2 additional risks with NVDA (the company) that I had not previously considered:
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the product cycles are fast due to their fast innovation and product development; this speed of innovation is preventing them to get disrupted but it is a double edged sword because they are disrupting themselves and this can cause inventory to be overbuilt leading to some real business problems.
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the lack of visibility into the level of inventory remaining in their channels. There are two of more layers which makes it more difficult to manage their inventory as they introduce a new generation of products. In this case of the crypto there is also a secondary market which exacerbates the inventory problem because when the crypto miners no longer need their GPUs because crypto prices tanked they will attempt to sell their used GPUs adding to the supply.
We are now seeing these 2 risks harming NVDA for 1-3 quarters. In considering these risks, I may need to think again about how much I am willing to allocate to NVDA.
Chris