Nvidia, the tech giant known for its soaring stock performance this year, has unexpectedly announced a $25 billion stock buyback program, causing a stir within the investment community. This move comes on the heels of a remarkable second-quarter report that exceeded expectations and propelled Nvidia's stock to new heights.
In a visual representation dated March 6, 2023, a smartphone featuring Nvidia's emblem is positioned atop a computer motherboard. The illustration serves as a reminder of Nvidia's reach into various technological domains.
On August 25, New York – Nvidia (NVDA.O), the industry leader in cutting-edge technology, unveiled plans to repurchase $25 billion of its own shares. This decision has caught some investors off-guard, given that the company's stock value has more than tripled this year. While many celebrated the outstanding second-quarter results, the unexpected stock buyback announcement raised questions.
The value of Nvidia's shares reached an unprecedented pinnacle on Thursday, following the company's quarterly revenue projection that far exceeded predictions. The surge in demand for Nvidia's chips, driven by the artificial intelligence boom, contributed significantly to this achievement. Although Nvidia's stock experienced a more than 6% increase on Thursday, the gains were partially relinquished, resulting in little net change by the end of the day.
However, the announcement of Nvidia's stock repurchase, ranking as the fifth-largest buyback declaration among U.S. corporations this year according to EPFR, left certain investors perplexed.
Traditionally, companies buy back their own stock to distribute capital among shareholders. Such buybacks often boost stock prices by decreasing available shares and amplifying demand, ultimately leading to improved earnings per share – a pivotal metric for investors.
While buybacks typically indicate a positive trajectory when a company's stock appears undervalued, Nvidia's stock value has skyrocketed by approximately 220% in 2023. This exponential growth has prompted investors to search for the rationale behind Nvidia's decision.
Baker Avenue Wealth Management's Chief Strategist, King Lip, expressed his bemusement, noting that although stock buybacks are typically welcomed by shareholders, a company as dynamically growing as Nvidia might be expected to reinvest their earnings back into the company for further expansion.
Contrary to the usual scenario where buybacks aid underperforming companies in maintaining earnings per share, Nvidia's unexpected move has raised eyebrows due to its status as a prominent name in the tech industry's growth sector. Synovus Trust's Senior Portfolio Manager, Daniel Morgan, emphasized the apparent message – that Nvidia's management perceives their stock as undervalued.
However, considering Nvidia's forward 12-month earnings estimates compared to the overall S&P 500, the notion of undervaluation becomes a point of contention. The disparity between Nvidia's valuation and that of the market as a whole, coupled with the company's historically high stock price, challenges the narrative of undervaluation.
Tom Plumb, CEO and Lead Portfolio Manager at Plumb Funds, emphasized that while stock buybacks during a stock's low phase are usually commendable, Nvidia's current valuation does not align with the typical scenario. Plumb suggested that the collapse of Nvidia's deal to acquire semiconductor designer Arm Holdings Ltd. last year due to regulatory concerns might have limited the company's options for resource allocation.
Despite generating substantial cash, exceeding the requirements for their ongoing investment strategy, Nvidia faces constraints in deploying these resources due to regulatory barriers. This has led to speculation about the optimal use of the company's surplus cash.
Nvidia's allocation of resources toward research and development in line with rival chip companies paints a picture of a company actively investing in its growth. As of now, Nvidia has not provided a comment on their buyback decision.
Nvidia's second-quarter earnings release outlined the approval of $25 billion for share repurchases without any time limitation. The company intends to continue buybacks throughout the fiscal year.
While the $25 billion figure is substantial, it only represents 2.1% of Nvidia's nearly $1.2 trillion market capitalization. This buyback yield falls short of the historical average of 2.58% for the overall S&P 500, as analyzed by Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices.
In contrast, other prominent tech and growth companies have undertaken even more extensive buybacks this year: Apple ($90 billion), Alphabet ($70 billion), and Meta Platforms ($40 billion). Tech companies often favor buybacks over dividends due to their potential impact on growth opportunities.
Despite the diverse opinions, some investors view Nvidia's buyback as a display of confidence. Francisco Bido, Senior Portfolio Manager at F/M Investments, whose large-cap focused fund includes Nvidia shares, highlighted that if Nvidia had identified better uses for the cash, they would have undoubtedly pursued them.
