Don’t jump the gun—Nvidia’s stock isn’t done falling

Even though CNBC’s Jim Cramer has long been a fan of Nvidia, a top chipmaker that dragged stocks lower Monday with a major revenue forecast cut, he understood why its stock has lost so much value.

For one, the announcement revealed some “obvious negatives,” Cramer said Tuesday on “Mad Money.” Chinese authorities have unexpectedly cracked down on video games, one of Nvidia’s key end markets; construction in another one of its key markets, the data center, has slowed; and the company still hasn’t completely gotten a handle on inventory overhangs with its cryptocurrency mining products.

The semiconductor maker is also in the midst of a transition that could add even more pressure: the shift from its current generation of graphics chips to its new Turing line of chips, which seem almost too advanced for the companies that need them now, Cramer said.

“That’s why the stock initially got slammed yesterday, … reversing all of its gains for the year,” he said. “That move actually made sense to me. […] Why? Because when companies pre-announce to the downside like Nvidia did yesterday, their stocks almost always take out their 52-week lows.”

In Nvidia’s case, that 52-week low is $124.46, down about $7 from its Tuesday closing price of $131.60. And, in Cramer’s experience, when a company issues an exceedingly negative pre-announcement, “you can’t pick at its stock until it takes out its 52-week lows.”

“Once Nvidia comes down to those levels, then there’s a case to be made that it might be worth nibbling at,” he said, adding that the stock’s late-Monday rally was a sign that buyers were way too eager. “Believe me, that weakness is worth waiting for, and [with] the bounce I expect from Apple and also the not-so-bad news from AMD? I think it’s going to happen. I don’t think it’ll be long-lived.”

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