Visualize This: Nvidia a Good (But Risky!) Trade Into Earnings

Cisco's out after the bell today and it'll get all kinds of focus from the media and a lot of mainstream money managers. Rightly so, I suppose, given the company's worth five Yahoos, two and half Disneys, or about one Apple. In other words, it's a big company. Cisco calls are a good source of insight about the current spending trends in the telecom and technology industries, although CEO Chambers never saw the bubble pop coming in 2000 or the bottom coming in late 2002, so as always you gotta take anything out of a CEOs mouth with a shovelful of salt.

At any rate, I think a much better earnings report to focus on this week from a trading standpoint is Nvidia which reports Thursday, even though if you just look at it's market cap it's only worth 1/12 as much as Cisco. But NVDA's growing faster and has a cleaner road map to future growth as graphics chips are far from hitting penetration rates that they someday will when your TV, toilet and door knob all project holographs in your home.

NVDA is trading at about 8x enterprise value to cash flows. That means, if you subtract the nearly $2 billion in net cash that the company has on the balance sheet (since it's just free cash sitting there in the company's checking account and they don't have any debt) from the $12 billion market cap that the stock market values the company's shares at here when you look at the $22 print and multiply that with the 550 million shares outstanding, you get a company that's worth about $10 billion. And they're cranking out somewhere over a billion dollars in cash per year right now.

IBM, Microsoft and Intel all recently gave strong earnings reports and they all give us some idea that NVDA's likely to do the same. The stock's down from $40 and up a bit from the recent lows. I'd use some slightly out of the money calls dated three or four months out and also a little common stock on this trade.

But remember, any trade into an earnings report is VERY HIGH RISK, especially when you use options. So don't use more capital than you can afford to lose.

Don't risk more than you can afford to lose. Good advice for trading and for dating. Wish I'd listen to that advice the next time I get in a bad relationship too.