- The broader Tech sector sell-off appears to be bottoming with hedge funds resuming their buying
- Nvidia is trading at its lowest valuation in 5Y ahead of its AI Conference today. Potential tailwind for the sector
- ASML is trading at a 33% discount to ATH and at 27x PE (a 22% discount to the 5Y average) and is an AI play in Europe to play the rebound
As mentioned in our recent weekly note, the Nasdaq has retraced 10% from its peak, with the market appearing to be bottoming out and rebounding from oversold conditions. The hedge fund cohort, which had been heavily selling the Tech sector before the sell-off, has now started adding back risk, marking a potential bottom with risks now more attractive to the upside amid negative upside dealer gamma, thin trading liquidity and systematic player positioning close to max short US equities.
The NVIDIA AI conference starting today (18 March) could be a positive catalyst for the broader risk-on sentiment, at a time when the stock is trading at the lower end of its 5Y valuation range and at a 20% discount to its all-time high spot. The CEO, Jensen Huang, is set to unveil the Blackwell Ultra, an enhanced version of Nvidia’s current flagship AI chip. The Blackwell Ultra is expected to accelerate AI model training and deployment, reinforcing Nvidia’s leadership in the AI hardware space. Additionally, Huang is expected to talk about the company’s next-generation GPU platform, Rubin, and the successor to its Grace line of CPUs, Vera. He will also likely provide reassurance on previous supply constraints for Blackwell and clarity on the outlook for gross margins.
ASML is still the only relevant AI play in Europe, has been trading 33% off its all-time high and has underperformed the broader Tech sector over the last year. Following the recent broader market sell-off, NVIDIA and ASML are trading at PEs of 25x and 27x, respectively, both at significant discounts to their peak ratings and at the lower end of the 5Y range, which we believe is supportive of short-term upside.
In terms of volatility, 1M ATM IV is currently rich at 2YPc94, swaying our thoughts to play the upside via Apr25 720/750 call spreads at a net cost of 1% of underlying (spot ref: 673.7). Should the spot price tick through our price target by expiration, the strategy would return 4.3x on premium employed. Further risk/return could be added by financing the position via Apr25 600 puts, reducing the cost of the strategy to a net credit of 0.3%.