Nvidia May Miss Expectations Ahead of Earnings Announcement (NASDAQ:NVDA)

Given the solid results and rising stock price, Nvidia (NASDAQ:NVDA) has set the bar very high. The bar could be even higher this quarter as the company finds it increasingly difficult to surprise investors.

Nvidia is expected report fiscal second-quarter 2025 results on Aug. 28, and analysts are expecting another solid quarter for the company. Earnings and revenue are expected to more than double from a year ago, to $0.65 per share on revenue of $28.7 billion.

The outlook will be critical, as expectations are high and the market has become accustomed to big gains and even stronger forecasts. For the third fiscal quarter of 2025, analysts are expecting earnings to rise 77% to $0.71 per share, on revenue growth of 75.4% to $31.8 billion.

Adjusted gross margins are also an important indicator and analysts are currently forecasting adjusted gross margins for the second quarter of the fiscal year gross margins of 75.5% and 75% for the third fiscal quarter.

Shrinking surprises

One thing that has been noticeable over the last few quarters is that beat rates have been steadily declining. This means that Nvidia’s reported revenue is approaching analyst estimates, which means the upside surprise is diminishing.

Moreover, the forecast surprises have also moderated over the past four quarters. For example, the fiscal third quarter of 2024 forecasts were 22% ahead of analysts’ estimates, while the most recent quarter’s forecasts were just 8.5% ahead of analysts’ estimates. That’s a sign that analysts are starting to catch up with the company’s forecast expectations, which are setting the bar higher for each quarter and harder to beat.

High level of implied volatility

The market seems a bit more uncertain about the company’s performance this quarter and is pricing in a larger upside of around 9% following the earnings release. Given the closing price of $129.37 on August 23, 2024, the stock could trade in a range of $117 to $141.

This is due to the very high levels of implied volatility for options expiring on August 30. Currently, the implied volatility for the $130 call strike price is around 100%, and the implied volatility is likely to continue to rise as the August 28 earnings date approaches. This is also one of the reasons why Nvidia stock has not been able to break above the $130 level over the past few trading sessions. The $130 gamma level is very high, and these significant option gamma levels often serve as support and resistance levels.

Options Dynamics

Many delta calls are being created at the $130 price level, which is also currently helping to function as resistance for the market. These delta and gamma levels are likely to increase as we approach Nvidia’s earnings due to rising levels of implied volatility. This indicates that option hedging flows are supporting the stock and helping to keep it around the $130 level in earnings.

However, the significant risk post-earnings is what happens to that implied volatility. Because once the earnings are released and the event risk has passed, implied volatility will drop dramatically. Historically, implied volatility has been nearly halved. Because of the way options pricing works, once implied volatility levels drop, both put and call premiums will drop dramatically, which will reduce the amount of delta and gamma in the market to act as support and resistance. This means that market maker margin flows will likely need to be reduced since so many positions are currently in call options.

In fact, the current premium for a $130 call option expiring on August 30 is $6.82 per contract. This means that the stock needs to rise above $136.82 by August 30 for a new buyer of these calls to make a profit, or about 6% from the price on Friday. However, if this implied volatility falls to 50%, the contract would be worth just $3.61, and when time value is factored in, the calls would be worth just $2.00 per contract.

This means that if the stock doesn’t rise above $137 after the results, at least based on the current market, the $130 call options will lose a ton of value after the results are released, regardless of how good or bad the actual report is. This could cause a lot of margin flow to come in for sale. The setup last quarter was very similar, and what saved the stock during that time was a 10-to-1 stock split that helped provide the fuel needed to drive the stock higher.

Peak growth

It’s also clear that Nvidia has passed its peak in revenue growth this cycle, and historically, stock price-to-sales ratios tend to expand and contract with revenue growth. This doesn’t mean that Nvidia stock will return to 5 or 6 times sales in the future, but it does suggest that the current price-to-sales ratio of 21 times over the past twelve months is likely to be reached in the next few quarters.

Perhaps the returns multiple will be closer to a sales multiple of 10, but if revenues grow, as analysts suggest, to around $225 billion, the stock could maintain a market cap close to that $2 trillion region. But much of that will depend on how quickly sales grow in the future.

But at this point, the long-term fundamentals of the business probably don’t matter much. What seems much more important, at least for now, is the momentum of the stock and, more importantly, the options positioning around the stock. Based on the current positioning, Nvidia will need to reverse its current trend and deliver a bigger upside surprise in both actual revenue and its guidance for the stock to reach the wall of resistance around $130-$135.