Options in Nvidia (
NVDA) were active on Monday amid takeover talk. Rumors of a possible take out of the graphics chipmaker are not new and, in fact, date back more than a year. However, on Monday, players in the options market seemed to be positioning for an announcement in the near future with active trading in options that expire in less than three weeks. At the same time, the long-term chart pattern of the stock and the fundamentals are also bullish. So, now might be a time to take a closer look at Nvidia for potential profit opportunities in 2008.
Headquartered in Santa Clara, California, Nvidia is a technology company that specializes in programmable graphics processors. The company’s processors are used in a variety of end products including workstations, notebook computers, PDAs, and cell phones. Nvidia employs more than 4,000 workers and had sales in excess of $3 billion last year. Shares trade on the NASDAQ under ticker symbol NVDA.
On Monday, NVDA call options were active, with focus on the January options that expire two weeks from Friday. According to Briefing.com, the action follows talk of possible interest in Nvidia on the part of Intel (
INTC). “The chatter is stemming from a Beijing TV segment that suggested this [takeover] possibility,” according to an intraday comment.
Shares didn’t react to the speculation, closing down 77 cents to $34.02 on Monday. However, players snapped up out of the money calls on hopes that an announcement might lift the share price soon. The January 37.5 calls were the day’s most actives. More than 4,700 contracts traded. A total of 13,000 calls traded total, compared to only 2,220 puts. The heavy trading in the short-term call seems to be speculative activity, or action by some investors making highly leveraged bets that NVdia shares will move substantially higher between now and January 18.
Talk of a NVDA takeover is not new. In fact, it dates back to July 24, 2006 when Intel’s rival, Advanced Micro Devices (
AMD), took over ATI Technologies. Since, like NVidia, ATI was a maker of graphics processors, the takeover fueled some speculation that Intel would counter AMD’s move by acquiring NVidia. So far that has not happened, but the activity on Monday reflects expectations that a possible acquisition is becoming more likely.
Interestingly, July 2006 also happened to mark an important bottom for NVidia shares. Figure 1 shows the weekly price action of the stock since mid-2005. Since July 2006, the stock has been riding an uptrend that, according to Elliott Wave analysis seems set to continue. NVDA is up 187% since AMD made its move on ATI.
Obviously, chasing a stock based on rumor and speculation is ill-advised. Most often, the rumor turns up bogus. Other times, there is some reality to the talk, but it takes much longer to materialize than anticipated. However, in the case of Nvidia, the company is clearly riding an uptrend and, after a 38% gain in 2007, the stock still trades at a relatively modest price-to-earnings ratio of 30, which is in-line with the industry average and also the company’s earnings growth rate over the past five years. In conclusion, given the technical action on the charts and the fundamentals, the potential for a takeover also makes NVDA worthy of a closer look in 2008.
