Cramer: Don't buy shares of Nvidia—the chipmaker is in the penalty box for now

  • CNBC's Jim Cramer tells investors to steer clear of Nvidia's stock as it hovers near its 52-week lows.
  • The company, which Cramer still regards as a best-in-show chipmaker, is in the "penalty box" for the moment, he says.

The breakdown in shares of Nvidia is a prime example of why investors should never fall in love with a stock, CNBC's Jim Cramer said Friday as shares of the chipmaker hovered near their 52-week lows.

The stock plunged as much as 19 percent after Nvidia's third-quarter earnings report, which missed revenue estimates. Management's guidance was also lower than expected, pressured by crimped profitability and excess inventory in its cryptocurrency mining business.

"What do you do with it right now? If you didn't own Nvidia, it's too soon to start buying it," Cramer said of the company's stock, which he used to own for his charitable trust. "There will be two more quarters of inventory problems."

"If you do own it, I think you need to recognize that it'll be a long time before this thing can come back. So if you can wait it out, you might want to if only because Nvidia still remains a great company and eventually they will get it right," he added. "Sadly, though, they made a serious misjudgment about the level of demand for their product. And for that, Nvidia's in the penalty box for a very long time."

The "Mad Money" host has been worried about a shortfall at Nvidia because its chips were being widely used for cryptocurrency mining, which he saw as a fad. On the post-earnings conference call Friday, Nvidia CEO Jensen Huang all but owned up to the weakness, calling its effect on earnings a "crypto hangover."

While its chips are also popular in the video gaming space, that business wasn't enough to hedge against the crypto-driven downturn, Cramer said. Still, he wasn't ready to give up on his longtime favorite in the space.

"Nvidia still makes the best graphics chips, which have become more powerful than traditional microprocessors. It still has a lead over the competition in a lot of uses, although you could argue that AMD's catching up to them in the data center while Intel rivals them in self-driving vehicles," he said. "I think Nvidia made an honest forecasting mistake, although given that some of us saw it coming, it was definitely an avoidable mistake."

These situations are why Cramer preaches "buy and homework," his method of buying stocks and studying them continuously rather than just buying and holding them.

"In the end, Nvidia is a company, and things can go wrong with a company," he said.

Shares of Nvidia closed down 18.76 percent, at $164.43. The stock made a new 52-week low on Friday of $161.61.

WATCH: Cramer goes slightly negative on Nvidia

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