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Don’t Be So Quick to Catch the Nvidia Stock Falling Knife

Nicolas Chahine

I come into this writeup today with mixed feelings. I am optimistic about the stock market’s prospects in 2019, especially in technology stocks. But the surprise pre-announcement yesterday from Nvidia (NASDAQ:NVDA) was a definite ding to my enthusiasm.

NVDA Stock: Don't Be So Quick to Catch the Nvidia Stock Falling Knife

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No, one headline is not going to kill my entire macroeconomic thesis, but it will stop me from considering NVDA as an investment here. Meaning I don’t catch this falling knife yet.

I will ignore the so-called experts. They all loved Nvidia stock when it was near $290 per share. Back then they were sure that it was the one must-own tech stock into the future. Clearly they were wrong then, and they will likely be wrong here.

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As more companies report their earnings, it will become easier to see if NVDA had intrinsic issues that caused it to lower expectations. My surprise did not come from the pre-announcement itself, but rather that it came so soon after their last earnings miss.

Late last year, Micron (NYSE:MU) was the poster child for all that was wrong with the sector. Investors feared high inventory levels and shrinking margins. Since then, MU stock bottomed and has been on a tear. After Monday’s announcement, NVDA will now replace MU as the negative Nellie of the bunch.

The company itself is to blame for this. Back in November NVDA delivered a bad earnings report and the stock fell over 30% after the headline. The results were bad and management offered a cornucopia of reasons. I am not a fan of excuses, so back then I wrote about the potential bounce trade but that the pain may not have been done. I specifically noted looming risks.

Yesterday, NVDA management dropped a surprise bombshell and the stock dropped 15% in minutes. They announced to the world that this quarter has been a “disappointing and extraordinarily and unusually turbulent one.” These are over-the-top descriptors and if they were meant to scare investors, they succeeded. So my cautionary tale from November was that indeed there were risks to fret. I am sure that they have their even more excuses this time too.

So, although I was a fan of the company on the way up, I am not catching the proverbial falling knife here. Yes, there might be a bounce trade to attempt, but the investment thesis into Nvidia stock as a sure-thing is definitely marred. This reminds me of how quickly Wall Street fell out of love with Chipotle (NYSE:CMG). Once the love ended in CMG stock, the hate continued for months. I fear that the same is happening to NVDA here.

So, instead of betting on a recovery in NVDA, I’d rather bet on other stocks in the sector. Intel (NASDAQ:INTC) or even American Micro Devices (NYSE:AMD) might be better bets here. Keep in mind that AMD reports tonight, so it’s a bet because of a short-term binary outcome over the headline.

INTC is roughly twice as cheap as NVDA from a price-to-earnings standpoint, so I’d rather risk my money there for now. Or if I don’t want to pick winners, I bet on the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) as a whole. There the risk is diffused across many tickers. This is especially convenient around earnings. If NVDA stock is rallying then so is the sector.

The onus is now on Nvidia team to prove to investors that this is a mere blip and that their winning ways will return. Until then, I will temper my enthusiasm in the stock. Fool me once, NVDA stock, then shame on you. Fool me twice and shame on me.

Technically. if Nvidia stock closes below $124 per share on the weekly chart then the downside potential from there could be huge. Don’t send me your hate mail yet. If the recent lows fail, they could trigger a bearish technical sell signal with another $50 lower. If that happens there would be support around $108 per share to help stop the bleeding. Again, I am not forecasting this scenario, just noting the possibility.

If you are long Nvidia stock, it’s probably not the right time to get out. This of course may vary from one situation to the other, but I bet that if the reaction to AMD earnings is good then the whole sector could rebound and help NVDA find footing.

But given the technical setup I just noted, then if the markets in general correct this week on a general malaise in earnings then there will be more pain for NVDA stock investors.

Click here for a bonus video on NVDA stock and a few technical concept. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.

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