Where's Nvidia Stock Headed Next After Q2 Guidance Letdown?

One of the many advantages of listening to Benzinga's PreMarket Prep show is that investors are instantly alerted to breaking news that comes out during the broadcast.

More importantly, the price action in an issue and its impact on the broad market is immediately relayed to investors.

That is exactly what happened near the end of Monday’s broadcast when NVIDIA Corporation NVDA issued preliminary second-quarter revenue guidance below estimates. The subsequent price action in the issue makes it the PreMarket Prep Stock of the Day.

What Could Go Wrong? In premarket trading Monday, investors were breathing a sigh of relief as there were no negative macroeconomic events that took place over the weekend.

As a result, the S&P 500 index futures were making a new high for the recent rebound and dragging many of the top components along for the ride.

One of those issues, Nvidia, was modestly in the green. After posting its high for the recent rally on Thursday ($192.74) and closing high ($192.15), the issue took a breather with the index Friday, ending the week at $189.19.

The strength in the index futures had boosted the issue as high as $191.36 in the premarket, and Nvidia was hovering around $190 when the news hit the tape.

Warning Shot Fired: With the company due to report in just over two weeks (Aug. 24), the company wanted to get the bad news out of the way. Perhaps the company was not comfortable with the rapid price appreciation from its July 5 low ($140.55) to Thursday’s high ($192.74), which was a $52.19 or 37% gain. 

With the move higher looking to continue, it was prudent to share the lower guidance with Wall Street.

Due to slowing gaming revenue, the company slashed second-quarter revenue from $6.7 billion vs. the $8.38 billion expected, or a 20% shortfall.

Sell And Ask Questions Later: In this algorithmically driven trading world, this type of news is going to be met with sellers and more sellers. Especially with the issue trading at its recent high and gunning for more.

Co-host Dennis Dick was the first to identify the Nvidia implosion on Monday's show.

“What just happened in Nvidia?” he asked, adding: “This could have a big impact on the overall market — you have to be careful. Once the news hits CNBC, it may have another leg lower.”

Following the news release, the issue traded down from the $190 area to $174.01 over the next 5 minutes and opened the regular session just above that level at $175.02.

Nvidia Moving Forward: After a company comes out and gives investors bad fundamental news, it is usually a good idea to be cautious about the issue. It is not uncommon for an issue to get hit and get hit again when the warning becomes official, in this case on Aug. 24.

Worse yet, the company still may have underestimated the shortfall and it is still unknown what the impact will be on EPS. Of course, Nvidia could pull a Walmart Inc WMT and immediately bottom and rebound back to the area at which it was trading before the warning, but that is rare.

Investors warming up to that scenario should focus on the issue holding Monday’s low, which is yet to be determined, and putting in at least one more low in that same area.

As of 1:45 p.m. EST, the low for the session stands at $172.42. If that level is breached, the next daily support comes in at its July 27 low ($169.13).

Wait And See: Even without the lower guidance, some sort of a retreat may have been in store for Nvidia. If the move lower continues, one possible area of support may at the $165 area. The reason is the issue had a pair of lows in that are from July 25 ($166.49) and July 26 ($164.78), In addition, $166.50 represents a 50% retracement of Nvidia's recent rally.

The discussion on the issue from Monday’s show can be found here:

Photo courtesy of Nvidia.