Nvidia Shorts Face $2.3 Billion Loss as Stock Hits Record High

Nvidia (NVDA), the dominant player in graphics chips for gaming and AI. Nvidia has experienced a remarkable 25% surge in its share price this year reaching an all-time high of $318.28 on May 24. The company’s exceptional performance can be attributed to strong demand. For its products across multiple sectors, particularly in data centers and gaming. As well as its groundbreaking advancements in AI and autonomous driving technologies.

Nonetheless, not everyone shares the same level of optimism regarding Nvidia’s prospects. According to data from S3 Partners, a financial analytics firm, investors. Who are betting against Nvidia’s success, known as short sellers. They have increased their positions by 11% since the beginning of the year, accumulating an additional $1.4 billion in short exposure. As of May 25, Nvidia had accumulated $10.6 billion in short interest. Making it the second most heavily shorted stock in the semiconductor industry, trailing only Intel (INTC).

Despite their negative outlook, short sellers have been losing money on their positions as Nvidia’s stock. It has consistently outperformed both the overall market and its industry peers. S3 Partners estimates that these short sellers have incurred approximately $2.3 billion in mark-to-market losses year-to-date. With $1.1 billion of those losses occurring in May alone. Furthermore, the firm’s analysis indicates that Nvidia has a short squeeze score of 100 out of 100. It indicating a high likelihood of a short squeeze occurring in the near future.

What is a Short Squeeze?

A short squeeze happens when many people who have sold stocks they borrowed (short sellers). Try to quickly buy back those stocks, all at once. This rush to buy causes the stock price to rise and leads to more losses for the remaining short sellers. It’s like a chain reaction where the increasing stock price encourages more short sellers to buy back their stocks. Making the price go even higher.

Short sellers borrow stocks from brokers and sell them. They hoping to purchase them later at a lower price and return them to the lenders, making a profit. However, if the stock price goes up instead of down. They start losing more money and their brokers demand that they pay back the borrowed stocks at the higher price. This forces the short sellers to buy back the stocks and return them, closing their positions.

As more short sellers have to buy back stocks, there is increased demand in the market, which drives the stock price up even more. This triggers more demands from brokers for short sellers to repay their borrowed stocks, leading to further buying back of stocks. This cycle can continue until most of the short positions are closed or the stock price becomes stable.

What Could Trigger a Short Squeeze for Nvidia?

Nvidia might encounter an interesting situation when it announces its first-quarter financial results on May 26 after the market closes. Analysts predict that the company will generate revenue of $5.41 billion. Which is a substantial 79% increase compared to the previous year. They also anticipate earnings per share of $3.28, reflecting a remarkable 103% growth year-over-year. Nvidia has consistently surpassed earnings expectations in the past four quarters, establishing a positive track record.

If Nvidia once again delivers a robust earnings report and raises its guidance for the second quarter, it has the potential to spark a surge in buying activity from both long-term and short-term investors. This influx of demand could drive the company’s stock price to reach unprecedented levels. Conversely, if Nvidia disappoints investors or offers a cautious outlook, it may provide some relief to those who have shorted the stock and result in a decline in its stock price.

What Are Some of the Risks Facing Nvidia?

Nvidia is currently experiencing some challenges that may impact its potential for future growth. These challenges include:

  • The global chip shortage: The semiconductor industry is currently facing a shortage in chip supply. This is due to a surge in demand from various sectors as the world recovers from the pandemic, coupled with limited production capacity. As a result, Nvidia may struggle to fulfill customer orders and this could hinder its revenue growth.
  • Regulatory obstacles for the Arm Holdings acquisition: In September 2020, Nvidia announced its plan to acquire Arm Holdings, a leading chip architecture designer for mobile devices and IoT applications, for $40 billion. However, the acquisition is facing significant regulatory scrutiny in multiple jurisdictions, including China, Europe, and the UK. Concerns regarding antitrust issues and national security have raised questions about the deal’s approval. It could take up to 18 months to finalize the acquisition, and there is a possibility that it might be blocked or subjected to unfavorable conditions by regulators.
  • Increased competition from rivals such as AMD and Intel: Nvidia faces strong competition from other players in the semiconductor industry, particularly AMD and Intel. Both AMD and Intel are heavily investing in the development of their own GPUs and AI chips. AMD has been gaining market share in gaming and data center segments with its Radeon and Epyc products. Meanwhile, Intel is planning to launch its own discrete GPU called Xe later this year. These competitors pose a challenge to Nvidia’s dominant position and may impact its pricing power in its core markets.

Opportunities and Risks in an Ever-changing Semiconductor Landscape

Nvidia is widely recognized as a highly innovative and successful company in the semiconductor industry, particularly excelling in the rapidly expanding gaming and AI markets. However, it’s worth noting that the company’s stock price may have already factored in much of its growth potential, leaving little margin for error or disappointment. Some investors who anticipate a decline in Nvidia’s performance are actively betting against it, while others who are optimistic hope to be pleasantly surprised by its continued success.

The upcoming earnings report has the potential to be a turning point in either direction. If Nvidia surpasses expectations and provides an optimistic outlook for the future, it could trigger a situation known as a “short squeeze,” leading to a further increase in its stock price. Conversely, if Nvidia falls short of expectations or lowers its future guidance, it could initiate a sell-off that provides some relief to those who have bet against the company.

Investors should brace themselves for significant volatility and potential fluctuations in Nvidia’s stock price around the time of the earnings report. It is crucial for them to carefully consider the risks and rewards associated with investing in Nvidia, particularly given its current valuation. Additionally, they should take into account their own risk tolerance and investment horizon before making any decisions.

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