NVIDIA (NVDA) Trading Lower Despite Blowout Quarter

NVIDIA Corporation (NVDA) stock is trading lower by about 1% ahead of Thursday's opening bell after the company beat top- and bottom-line second quarter 2020 estimates by wide margins and raised third quarter revenue guidance. The graphics chip manufacturer reported a profit of $2.18 per share, much higher than the consensus estimate of $1.68, while revenue rose an impressive 50% year over year to $3.87 billion, also beating estimates. The sell-the-news reaction caught overly aggressive traders on the wrong side of the tape, but the reaction makes sense, with near-perfection baked into the current stock price.  

Data center revenue surged during the second quarter to $1.75 billion, 167% higher than the same period in 2019. This division is diversifying NVIDIA income while lowering dependence on the broad retail customer base. Mellanox is paying off as well, with the international supplier of computer networking products adding $0.14 per share to profits in the first partial quarter since the acquisition closed on April 27.

A strong product cycle also drove the blowout results, while expectations for the new gaming chip, set for release at month's end, are running high. Microsoft Corporation's (MSFT) brand-new Flight Simulator 2020 should underpin sales of the new processor, especially after glowing industry reviews. A second pandemic wave could be the icing on the cake later this year, with video gamers forced to stay home once again to avoid infection.

Cowen raised its NVIDIA price target from $475 to $540 in Thursday's pre-market, with analyst Matthew Ramsey noting that "another significant beat/raise as Ampere DC and Mellanox drove Q2 2020 strength, with greater than 25% quarter-over-quarter gaming growth expected in Q3 2020." However, he also cautioned that "the bar was high, and core DC-GPU growth may not have cleared some hurdles."

NVIDIA Short-Term Chart (2018 – 2020)

A powerful uptrend topped out at $292.76 in October 2018, giving way to a steep decline that relinquished more than 57% in less than three months before bottoming out in the mid-$120s. A relief rally into April 2019 stalled in the lower half of the trading range, yielding a successful test at the low in June. The subsequent uptick completed a double bottom reversal in October when it lifted above the prior high, finally completing a round trip into the 2018 peak in February 2020.

An immediate breakout added 23 points in three sessions before turning tail in a selloff that reinforced resistance near $300. Committed buyers emerged near $180 in March, yielding a V-shaped recovery wave that reached the first quarter high in May. The stock then took off for the heavens, adding more than 180 points into this week's all-time high at $499.84. It has sold off about 19 points into this morning's early print, establishing $500 as a major resistance level.

Price action eased into a rising channel in June, with the uptick compressed within those boundaries into August. It reversed at channel resistance ahead of the news and could now drop to channel support near the 2.00 Fibonacci extension of the 2018 selloff. That harmonic level marks a high-odds turning point in exceptionally strong uptrends, so a breakdown is likely to signal an intermediate correction that shakes out a large supply of weak-handed shareholders.

The Bottom Line

NVIDIA stock reversed at $500 earlier this week and has added to losses, despite blowout second quarter earnings. This downtick could pick up steam in coming sessions, dropping into support between $460 and $470. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.