Nvidia’s Q4 Earnings Offset by DeepSeek Competition Concerns
Nvidia’s Earnings Release and Market Reaction
After Nvidia, Inc. NVDA shared its earnings Wednesday evening, some analysts on X were quick to downplay the impact of the DeepSeek threat.
Nvidia stated that it optimized operations to counter DeepSeek. However, the market might not have fully understood the significance of DeepSeek’s breakthrough until January. This implies that the effects on Nvidia’s financial performance are yet to materialize. Additionally, Nvidia’s earnings growth rate is starting to decline, and its gross margins are also showing a downward trend. Consequently, these factors appeared to influence investor sentiment, leading to an 8.48% drop in Nvidia’s stock price on Thursday.
Bearish Positions Against Nvidia Yield Profits
Investors may remember that we initiated our first bearish position against Nvidia on January 24th.
In that announcement, we noted,
“Believe it or not, we’re betting against Nvidia (NVDA -7.55%↓) here. A Chinese start-up launched its own competitor to OpenAI’s ChatGPT, called DeepSeek, which has impressed top tech minds like Steve Hsu and Marc Andreessen. This raises concerns for Nvidia, especially since it was developed with a minimal capital investment of just a few million dollars, suggesting reliance on expensive chips like Nvidia’s may diminish. We’re forecasting a modest short-term decline in Nvidia’s stock, not predicting the company’s failure.”
Our initial trade involved purchasing short-term puts on the stock. We sold half of those puts on the same day for a 200% profit, with the remaining half sold the following Monday at an impressive 2,633% profit.
- Puts on Nvidia (NVDA -7.36%↓). Bought for $0.75 on 1/24/2025; sold (half) on the same day for $2.25. Profit: 200%.
- Puts on Nvidia (NVDA -5.78%↓). Bought for $0.75 on 1/24/2025; sold (half) for $20.80 on 1/27/25. Profit: 2,633%.
Subsequently, we placed additional bearish positions against Nvidia on January 29th.
In this latest update, we shared our bearish rationale and outlined the timing of these trades:
“In short: The February 2025 call could signal early warning signs, but not the full extent of the issue.
Our strategy is to place a moderately bearish bet on Nvidia maturing at the end of February, and then a more assertive bearish bet set to expire in September, following Nvidia’s August earnings report.
Our short-term bearish position consisted of a vertical spread, set to expire on February 28th, involving buying the $128 strike calls and selling the $127 strike calls for a net credit of $0.76.
It is important to mention that this trade took weeks to execute. Nvidia shares needed to rise to near $140 on February 18th before we could secure a favorable call spread. We exited that position on Thursday, achieving a 238% gain.
- Call spread on Nvidia (NVDA 0.00%↑). Entered at a net credit of $0.76 on 1/29/2025; exited at a net debit of $0.19 on 2/27/2025. Profit: 238%.
Long-Term Bearish Outlook on Nvidia
Our long-term bearish position is a put spread designed to maximize profit if Nvidia trades below $96 by next September. By then, we will assess the impact of DeepSeek and competition from Chinese chip manufacturers on Nvidia’s revenue and earnings.
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