The next generation of cars will come with sensors for everything from speed limits to sleepy drivers. Options traders in Nvidia Corp. (NVDA) are betting you’ll want to drive one.
Nvidia, which is expanding its high-end chip technology into automobiles, has seen its shares rally 15 percent this year, twice as much as the Standard & Poor’s 500 Index. Bullish calls have reached the most expensive level in almost four years compared with bearish puts, data compiled by Bloomberg show.
Faced with declining demand for personal computers that run its gaming chips, Nvidia is looking to new markets, such as cars that run driver-assistance and entertainment systems. Revenue from the company’s Tegra processor, originally designed for smartphones, rose 35 percent during the first quarter, driven by growth in automotive applications.
“There is a growing recognition that this is no longer a one-trick pony that’s inextricably tied to PCs,” Matthew Kaufler, manager of Federated Investors Inc.’s Clover Value Fund, which as of July 8 included 2.6 million Nvidia shares, said by phone from Rochester, New York. “They have done a great job starting to capture these incremental growth opportunities like autos.”
Audi and other automakers are now using both Qualcomm Inc. and Nvidia chips to connect cars to the Internet and make them aware of their surroundings. Top-of-the line Audi AG models use more than 6,000 semiconductors. A demonstration version of the A7 sedan running an Nvidia Tegra processor drove itself onto the stage at the graphics-chip maker’s annual conference in March.
The market for automotive chips is projected to increase 6.1 percent to $27.9 billion this year, according to a report from IHS Corp. The fastest growth will be in processors for automated driver-assistance systems, which may rise an average of 13 percent annually through 2020, the Englewood, Colorado-based research firm said.
Calls betting on a 10 percent rise in Nvidia shares cost 1 point less than puts betting on a similar-sized loss, according to data compiled by Bloomberg on six-month contracts. The price relationship known as skew fell to 0.36 on July 1, the lowest level since October 2010.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 8.6 percent to 13.10 at 10:35 a.m. in New York today.
Among the 10 options with the highest ownership, eight are calls. January $21 calls and August $20 calls had the highest open interest among bullish contracts.
Hector Marinez, a spokesman for Santa Clara, California-based Nvidia, declined to comment on the options trading.
Chipmaker shares tumbled at the end of last week as Advanced Micro Devices Inc. forecast third-quarter sales below analysts’ estimates. The projection may indicate that AMD isn’t benefiting from a rebound in corporate spending on computers that has buoyed other companies in the personal-computer industry.
AMD dropped 1.8 percent to $3.76 today, while Nvidia gained 0.1 percent to $18.46.
It’s going to take time for Nvidia to adapt its technology for new uses and demand for PC gaming chips are in decline, according to Deepon Nag, a New York-based analyst at Macquarie Group Ltd. Graphics processing units that are primarily used for playing computer games accounted for 81 percent of the company’s revenue last quarter.
“While these new markets like auto are very exciting, they still derive their revenues from the discrete graphics market,” Nag said in a phone interview on July 10. “In the near term, PC graphics is their business and we see a downturn in demand.”
Sales of Nvidia’s chips in autos and supercomputers will help the company overcome the slump in PCs, Kevin Cassidy, an analyst at Stifel Nicolaus & Co Inc., said in a phone interview. The company will probably increase profit by 13 percent this year, the most since 2012, according to analyst estimates compiled by Bloomberg.
Supercomputers are using more graphics chips from Nvidia and AMD to boost speed and power, according to a report last month from the International Supercomputing Conference in Leipzig, Germany. Of the top 500 supercomputers, 62 use co-processors, up from 53 in November 2013, the report said. Nvidia chips were used in 71 percent of those machines.
“Twenty years from now you may look back and say Nvidia gaming was just a way to get volumes up and then take processors into supercomputers and other applications,” Washington-based Cassidy said on July 2.
(An earlier version of this story was corrected to show Federated Fund owns 2.6 million Nvidia shares.)
To contact the reporter on this story: Oliver Renick in New York at firstname.lastname@example.org