3D graphics processor designers NVIDIA Corp. (NVDA US) is down 9% after analysts from Instinet, Nomura and BMO gave it a “sell” rating. Citing a slowdown in the gaming industry and strong competition in the chip market the analysts see the stock as overvalued and lowered their target prices. Instinet and Nomura lowered their target prices from $100 to $90 and BMO lowered its price from $100 to $85. While the consensus target price remains high at $118, NVDA’s stock price fell to $100.49 on Thursday and is trading slightly higher today.
NVDA’s short interest averaged $917 million in 2014 and $1.1 billion in 2015 and more than doubled in the first half of 2016, reaching $2.5 billion by mid-year as NVDA’s stock price rose 43% to $47.01. Short sellers kept their foot on the accelerator and NVDA’s stock price soared, hitting $7.7 billion by mid-December as NVDA’s stock price broke the $100 price barrier for the first time. With NVDA’s stock price firmly over $100 short sellers, who were chasing a momentum reversal, began to cover their positions as a classic price short squeeze forced them to buy cover $3.7 billion of their short exposure by the end of January 2017. The short side surrender continued in February, with another $2 billion of short covering hitting the tape. NVDA short interest is now at $1.8 billion, off 76% from its December 2016 historical high and down 69% for the year.
| S.I. & P/L in $ millions | Average Short Interest | Net Mark to Mrkt P/L | P/L Return % |
| 1st Quarter 2016 | $1,636.9 | -$221.9 | -13.55% |
| 2nd Quarter 2016 | $2,450.5 | -$694.1 | -28.33% |
| 3rd Quarter 2016 | $3,107.5 | -$1,091.4 | -35.12% |
| 4th Quarter 2016 | $5,655.0 | -$2,622.3 | -46.37% |
| 1st Quarter 2017 to date | $3,614.7 | -$13.9 | -0.38% |
| 2016-2017 to date | $3,268.6 | -$4,643.5 | -142.06% |
| February 24,2017 | $1,809.5 | – | – |
Short sellers were down $916 million in net mark to market P/L in the first half of 2016 as they built their positions up to the $2.5 billion level. They continued to short NVDA as it hit $100/share but took $3.9 billion in additional losses in the second half of 2016 before their conviction started to wane in late December. Short interest declined steadily in 2017, dropping $4.0 billion or 69%, to its present level of $1.8 billion in shorts. With the recent 9% drop in NVDA’s stock price, short sellers are relatively flat in 2017, down only $13.9 million, or 0.38%, for the year.
Short sellers who were holding on and hoping for NVDA’s momentum rally to fade finally got some vindication this week, but depending on how long ago they initiated their positions, it is a hollow victory. Most short sellers covered their positions over the last two months as they could no longer fight the tape and answer the bell for the next round. We will see if NVDA’s recent price drop will bring back the short sellers who covered, hoping to recoup some of their $4.6 billion in mark to market losses. If price momentum continues to be negative there are several billion dollars’ worth of short sellers who have a score to settle and help nudge NVDA’s price even lower.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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