Nvidia's stock-buyback plan is one of the biggest of 2024. Is that a good thing?

By Emily Bary

Nvidia is 'taking shareholder interests to heart,' one analyst says, but another expert notes the buyback program is a strange look when the CEO is selling stock

Nvidia Corp. is throwing off cash, and the company plans to return even more of that to investors.

The semiconductor company announced alongside its earnings on Wednesday that it has boosted its stock buyback authorization by $50 billion. That's double the size of the $25 billion share-repurchase program announced a year ago, which still had $7.5 billion remaining on it as of the end of the latest quarter.

Nvidia (NVDA) bought back nearly $15 billion in stock during the first half of its fiscal year, and the scale of the new program suggests the company could ramp up repurchases going forward.

But is the upsized program a good signal for investors? There's some debate among analysts.

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When companies buy back stock, that reduces the count of shares outstanding and thereby can give a boost to earnings per share, since the denominator is lower.

"When we see a company do a buyback, pretty typically, there is a view that the company is taking shareholder interests to heart and trying to align in that way," S&P Visible Alpha TMT analyst Melissa Otto told MarketWatch.

She likened Nvidia's move to ones made by Alphabet Inc. (GOOG) (GOOGL), which has announced $70 billion in buyback authorizations in recent years.

"They're two different companies, with two different business models, but they do play in the technology universe," she said. And given the big growth in both businesses, "shareholders will start to ask questions about the law of big numbers," or how much more growth potential is out there for companies this large.

In that sense, "it's always good to see that a company acknowledges that it's doing well...but at the same time, needs to think about the way to reward shareholders in addition to the fundamentals of its business," Otto added.

Fundamentally, in her view, the job of management teams is to think about shareholder value. When it comes to the question of how to spend an amount like $50 billion, Otto noted that Nvidia has already built a "terrific platform" but executives may have realized that it's time to "think about...shareholders in a different way."

Typically with buybacks, companies look to make repurchases when they see shares as undervalued. Melius Research's Ben Reitzes noted that "if shares fall," Nvidia now has "a big buyback lever."

Prior to Nvidia's report, he estimated that the company could churn out $270 billion in free cash flow within three years. "Given this surge in cash flow, it should be able to return an overwhelming amount of that cash to shareholders since there will be nowhere else for it to go," he wrote earlier in August.

Nvidia's buyback announcement ties with Meta Platforms Inc.'s (META) as the third-largest of the year, according to data from Birinyi Associates. Only Apple Inc. (AAPL) ($110 billion) and Alphabet have unveiled bigger ones.

Looking beyond the year, Nvidia's announcement is tied for the 12th-largest on record. The company is one of only seven in the U.S. to have announced a buyback program of $50 billion or more.

The buyback authorization is 1.7% the size of Nvidia's market capitalization, which is about $2.91 trillion.

StoneX senior strategist James Stanley noted that the buyback program wasn't enough to excite investors and might not make sense at a time when Chief Executive Jensen Huang has been selling stock through a trading plan.

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Stanley doesn't fault Huang for unloading stock after a massive run for the shares over two years, and he said a selling plan "just makes sense" for the Nvidia CEO.

"But it also sounds a little bit different when you're using treasury funds to buy that same stock at or near all-time highs," he noted. Nvidia shares closed Wednesday, just before the earnings and buyback announcement, off 7% from their record close of $135.58 that was hit in June.

While some analysts see Nvidia's stock as cheap, Stanley thinks it's "richly valued" trading at a multiple of 37 times price to sales as of Thursday.

At the same time, Stanley can see why Nvidia isn't pouring its cash into improving infrastructure capacity at a time when demand still outstrips supply for the company's artificial-intelligence hardware.

"We have a recent cautionary tale with Tesla," which "essentially overbuilt with capacity." Tesla has now " found themselves in this Catch-22 where if they cut production, they're also going to be taking hit on margins, because they have so much capacity," he said.

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In his view, it's "almost justifiable" for Nvidia to "lean towards more demand than oversupply."

In the current regulatory climate, Nvidia may also have trouble doing major deals with its troves of cash.

Gimme Credit analyst Dave Novosel noted that Nvidia spent about $300 million on acquisitions in the first half of the fiscal year. "We assume most future deals will be rather small," he wrote.

-Emily Bary

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08-30-24 1106ET

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