Nvidia Stock, Salesforce, Snowflake Headline Huge Week Of Tech Earnings; What’s Wrong With PANW Stock?

Wall Street cheered an earnings beat and raised outlook from Cisco Systems (CSCO) Thursday, giving technology investors optimism that upcoming reports from Nvidia (NVDA), Salesforce (CRM) and Snowflake (SNOW) will have similarly good news. Nvidia stock has rallied back above its key 50-day moving average after the company slashed its revenue outlook, and fell below it, earlier this month.

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Nvidia still generates much of its revenue from computer gaming, but it’s also well positioned in fast-growing markets like data centers, artificial intelligence and autonomous vehicles.

Watch for other earnings reports in the technology sector from Palo Alto Networks (PANW), Autodesk (ADSK), Box (BOX) and Splunk (SPLK).

In the options trading market, a put option could make sense for PANW stock as the security software heavyweight gets repeated resistance at its 200-day moving average. An Accumulation/Distribution Rating of D is hurt by several higher-volume declines in recent weeks. But Palo Alto still boasts top fundamentals, with annual earnings expected to rise 21% this year and 24% next year.

Nvidia Stock Firms Up After Warning

The chip bellwether slumped 6% on Aug. 8, but rallied off lows, after the company lowered its revenue outlook for the current quarter, mostly due to weakness in the computer game consoles market. Nvidia forecast revenue of $6.7 billion, well below prior guidance of $8.1 billion. At the time, the company forecast gaming revenue of $2.04 billion, down 33% year over year. But Nvidia also said it expects data-center revenue to be up 61% to $3.81 billion.

Nvidia stock has a Composite Rating of 68 from Stock Checkup, ranking it No. 10 in the chip designer group. The rating is hurt by NVDA’s weak Relative Strength Rating of 30. The RS Rating is weighed down by lagging price performance over the past 12  months. NVDA stock is down more than 30% year to date, compared to a decline of around 10% for the S&P 500.

For the current quarter, the Zacks consensus estimate is for Nvidia’s adjusted profit to fall 43% to 59 cents a share, with revenue up 9.5% to $7.12 billion. Results are due Wednesday after the close.

Nvidia stock is just below its recent high of 192.74 as it sculpts a bottoming base. It might be a tall order, but Nvidia is in position for a breakout try from a base that started forming in early June.

More Tech Earnings To Watch

Results from Dow Jones stock Salesforce are due Wednesday after the close, along with ADSK, BOX, SNOW and SPLK.

Salesforce stock shows three straight quarterly earnings declines amid decelerating revenue growth. But CRM has still been able to deliver 20%+ top-line growth for several quarters in a row. Still, revenue growth is expected to decelerate again for the current quarter, up 21.5% to $7.7 billion.

Like CRM stock and NVDA stock, software giant Snowflake has also rallied off lows ahead of results. SNOW isn’t profitable yet, but the company shows huge revenue growth in recent quarters and also boasts excellent mutual fund sponsorship.  For the current quarter, revenue is seen rising 71% to $465.6 million.

Options Trading Strategy

A basic options trading strategy around earnings using call options allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might already have broken out and are getting support at their 10-week lines for the first time. Some might be trading tightly near highs and refusing to give up much ground. Nvidia stock is still far off highs, but it’s holding gains well. Avoid extended stocks that are too far past proper entry points.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price. You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified some bullish earnings setups for a call option, check strike prices with your online trading platform or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask. Look for a strike price just above the underlying stock price (out of the money) and check the premium. The premium ideally should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective. But keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most that can be lost is the amount paid for the contract.

Nvidia Stock Option Trade

Here’s how a call option trade recently looked for Nvidia.

When shares traded around 187.50, a weekly call option with a 187.50 strike price (Aug. 26 expiration) came with a premium of around $6.75, or 3.6% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of NVDA stock at 187.50 per share. The most that could be lost was $675 — the amount paid for the 100-share contract.

When taking the premium paid into account, Nvidia would have to rally past 194.25 for the trade to start making money (187.50 strike price plus $6.75 premium per contract). Keep in mind this is not a trade for a small account because taking delivery of 100 NVDA shares would cost of $18,750.

Meanwhile, Palo Alto Networks has been struggling to attract buyers after numerous attempts to get back above its 200-day moving average. The 200-day line has been a resistance level since early June.

When PANW stock traded around 517.75, a weekly put option with a 517.50 strike price (Aug. 26 expiration) offered a premium of $21.75, or 4.2% of the stock price at the time. Results will be out Monday after the close.

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight

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