Stock Performance: A Spectacular Climb
Nvidia, after seeing its stock soar by more than threefold this year, has decided to repurchase $25 billion of its shares. This move took some investors by surprise, especially following a phenomenal second-quarter report. On the heels of this report, Nvidia’s shares surged by over 6% on Thursday, reaching an all-time high, although they settled for a slight increase by the end of the day.
Buyback in Perspective: Fifth-Biggest in 2023
Among U.S. companies, Nvidia’s buyback announcement is the fifth-largest this year, based on data from EPFR. Typically, companies buy back shares to give back to shareholders. This not only can drive up the stock price by reducing its availability but can also elevate the earnings per share - a metric investors pay close attention to. However, given the sharp rise of Nvidia’s shares by 220% in 2023, investors are puzzled by this choice.
Expert Opinions: The Buyback Debate
King Lip from Baker Avenue Wealth Management comments that while shareholders generally appreciate buybacks, for a rapidly growing firm like Nvidia, it's preferable to see their profits reinvested in the business. Daniel Morgan of Synovus Trust echoes this sentiment, noting that the buyback was unexpected from a leading tech growth company like Nvidia. The underlying message seems to be Nvidia's belief that their stock is undervalued.
Analyzing Nvidia’s Valuation
It might be challenging for some to see Nvidia as "undervalued". As of the prior Wednesday, Nvidia shares were trading at a multiple of 45 times projected earnings for the next year. In comparison, the average for the S&P 500 was about 19 times, based on Refinitiv Datastream figures. Tom Plumb of Plumb Funds, however, suggests that Nvidia might be looking for ways to utilize its resources, especially after its unsuccessful attempt to acquire Arm Holdings Ltd due to regulatory concerns.
Usage of Accumulated Cash
Nvidia has been accumulating a significant amount of cash, more than needed for its current investment strategies. The company committed roughly 27% of its revenue to R&D the previous year, comparable to its competitors in the chip industry. With restrictions in place preventing the acquisition of key complementary businesses, the question arises: What should Nvidia do with its excess cash?
Comparing with Tech Giants
In terms of buyback value, Nvidia's decision represents just 2.1% of its nearly $1.2 trillion market cap as of Wednesday. This is slightly lower than the S&P 500’s historical 2.58% buyback yield. Other tech giants, including Apple, Alphabet, and Meta Platforms, have announced even larger buybacks this year. Notably, tech companies generally favor buybacks over dividends, as regular dividends might restrict their growth opportunities.
Diverse Reactions from the Investment Community
Francisco Bido of F/M Investments views Nvidia’s buyback as a "show of confidence", suggesting that if there was a more advantageous use for the funds, the company would have pursued it.