- Short Interest in Nvidia has reached its 15 year highs.
- The metric indicates that market participants are expecting its stock to plunge going forward.
- Gauging from Nvidia's current market position, its short interest could surge further.
Graphics technology giant NVIDIA (NSDQ:NVDA) has been extremely rewarding for shareholders over the past year. Its shares have surged by 67% over the past 12 months alone primarily driven by strong financial growth quarter after quarter. Now that the stock is hovering near its 10 year highs, the question that everyone’s asking is: Will this rally continue or will it fizzle out going forward? I believe that analyzing the short interest data would allow us to have a better understanding of what lies ahead for Nvidia shareholders.
Short interest data
Let me start by saying that short interest is the aggregate number of short positions that are yet to be covered. The data is released by FINRA on a bi-monthly basis. A sharp rise in the metric suggests that traders and speculators have rapidly accumulated short positions hoping that the stock price would plunge going forward. In contrast, a sudden drop in the metric suggests that there has been a sharp unwinding of short positions, as market participants no longer see a further downside in the stock. So the metric basically illustrates the general market sentiment relating to any particular stock that’s on our radar.
(Image Source: Ycharts)
If we take a look at Nvidia’s short interest data in the chart above, it’s clear that there has been a sharp 32% increase in short positions over a period of just 15 days. What’s more interesting is that while the stock is hovering near its 10 year highs, short interest in the company appears to have consecutively surged to near 15 year highs. At the end of the last FINRA reporting cycle, short interest in the company stood at approximately 76 million shares which represents a significant 14.86% of the company’s entire float.
(Compiled by author, Source: NASDAQ)
It’s also worth noting that liquidity in the stock hasn’t really dried up amid this sharp accumulation of short positions. The time required to cover all short positions, as per the average liquidity levels of FINRA’s last reporting cycle, stands at about 8.8 days. The chart above illustrates that this isn’t exactly a record high which essentially suggests that a short squeeze is unlikely to occur anytime soon. However, looking at the overall short interest data, we are led to conclude that:
- Traders and speculators have rapidly grown bearish on Nvidia,
- These market participants believe that Nvidia is overvalued,
- Investor participation is likely to dip going forward,
- Negative announcements and earnings misses expected ahead,
This leads us to the big question: What lies ahead for Nvidia shareholders?
Understanding market action
The sudden rise in Nvidia-specific short interest is due to a number of reasons. First and foremost, Intel’s multi-year licensing deal with Nvidia ends in 2017 and preliminary reports suggest that the chipzilla is taking its business over to AMD from thereon. To put things in perspective, Nvidia used to receive an annual fee of about $250 million from Intel, which represented a whopping 22.9% of Nvidia’s overall EBITDA for the last fiscal year. With this risk-free EBITDA stream drying up in 2017, the stock is bound to correct significantly.
Another significant development is that Nvidia’s upcoming Pascal GPU’s don’t support asynchronous computing at the hardware level, while AMD’s Polaris GPUs do. I won’t go into the technical details of this technology as it’s already been explained here, but the basic crux of it all is that AMD GPUs are theoretically far superior than Nvidia’s. This puts AMD in the driver’s seat. If the article linked above is correct, we can see AMD snatching away market share from Nvidia, at least until the latter starts to support async computing on a hardware level, or until AMD’s Polaris cards are demoed in benchmarks going forward.
The slowing down PC sales is another reason for concern. Nvidia generated about 83.5% of its revenues from the sale of its GPU cards to PC clients (desktop and laptop, retail and OEMs) during FY15. This lack of diversification and over-reliance on the PC segment is surely going to cause a drag on Nvidia’s growth going forward as IDC projects overall PC sales to shrink by 0.4% annually over the next 5 years.
Putting it all together
Nvidia may have made significant investments in the field of virtual reality but the industry is still in its nascent stages for the time being. Until then, Nvidia might run into some headwinds.
Slowing down PC sales coupled with rising competition from AMD and the loss of licensing revenue from Intel presents a dismal outlook for Nvidia. This is why I’m of the opinion that the sudden surge in Nvidia’s short interest isn’t merely a hedging position, but instead is directly correlated to the increased bearishness surrounding the company.
I’m expecting a sustained increase in short interest, and a subsequent weakness in its stock, as we head further into 2016. You can see Amigobulls' NVIDIA Corporation stock analysis video for a quick look at key financials.