Nvidia, the world’s leading chipmaker for artificial intelligence (AI) and gaming, announced on Wednesday that it would repurchase up to $25 billion worth of its own shares, a move that surprised some investors who expected the company to reinvest its earnings into its fast-growing business.
A Record-Breaking Quarter
Nvidia reported a stellar second-quarter performance, beating analysts’ expectations and raising its revenue forecast for the third quarter. The company’s adjusted revenue in the second quarter was $13.51 billion, up 68% year-over-year, driven by strong demand for its graphics processing units (GPUs) and AI systems across various industries. Nvidia’s gaming segment, which accounts for more than half of its revenue, rose to $2.49 billion, up 85% year-over-year, as gamers continued to upgrade their hardware amid the pandemic. Nvidia’s data center segment, which includes its AI products, grew to $4.93 billion, up 35% year-over-year, as cloud service providers and enterprises adopted its platforms for deep learning and high-performance computing.
Nvidia also benefited from its acquisition of Mellanox Technologies, a maker of high-speed networking chips, which contributed $1.07 billion to its data center revenue. The company is also awaiting regulatory approval for its proposed $40 billion takeover of Arm Holdings, a British chip designer whose technology powers most of the world’s smartphones and tablets.
Nvidia’s forecast for the third quarter was equally impressive, as the company projected revenue of about $16 billion, well above the consensus estimate of $12.5 billion. The company said it expects continued growth in its gaming and data center segments, as well as in its automotive and professional visualization businesses.
A Head-Scratcher for Some Shareholders
Despite the stellar results and outlook, some investors were puzzled by Nvidia’s decision to launch a massive stock buyback program at a time when its shares are trading at record highs. Nvidia’s stock has more than tripled this year, making it the first chip company to surpass $1 trillion in market value in May. The stock closed at $223.32 on Wednesday, up 3.2% for the day, and rose another 9.6% in after-hours trading following the earnings release and buyback announcement.
Stock buybacks are a common way for companies to return excess cash to shareholders, as they reduce the number of outstanding shares and increase earnings per share (EPS), a key metric for investors. However, buybacks are usually seen as more favorable when a company’s stock is undervalued or depressed, as they signal confidence in the future prospects of the business and provide support for the share price.
However, Nvidia’s stock is far from cheap, as it trades at 45 times forward 12-month earnings estimates, compared with about 19 times for the S&P 500 index, according to Refinitiv Datastream. Some investors wondered why Nvidia would spend so much money on buying back its own shares instead of investing more in research and development (R&D), acquisitions, or dividends.
“It’s a little bit of a head-scratcher,” said King Lip, chief strategist at Baker Avenue Wealth Management, which has $2.5 billion in assets under management and counts Nvidia as a top-10 holding. “As a shareholder, we like to see stock buybacks, but for a company like Nvidia that is growing so fast, you kind of want to see their earnings being plowed back into the company,” Lip added.
Daniel Morgan, senior portfolio manager at Synovus Trust, which owns Nvidia shares, also expressed surprise at the buyback announcement from “a hot growth tech name.” He said that the message from Nvidia’s management seemed to be that they believe their stock is undervalued.
“Historically, you’d love it when a company is able to buy their stock back when it is depressed, but I don’t think anybody can make the case that it is at a depressed place right now,” said Tom Plumb, CEO and lead portfolio manager at Plumb Funds, which has Nvidia as one of its largest holdings.
A Sign of Confidence in AI
On the other hand, some analysts and investors saw the buyback announcement as a sign of confidence from Nvidia’s management in the long-term potential of AI and its dominant position in the market. They argued that Nvidia has enough cash flow and balance sheet strength to fund both its buybacks and its growth initiatives.
Nvidia said it had $23.6 billion in cash and equivalents at the end of the second quarter and generated $4.7 billion in free cash flow during the period. The company also said it expects to generate more than $20 billion in free cash flow over the next four quarters.
The company said it spent $3.28 billion on buybacks in the second quarter and has $7.24 billion remaining under its previous authorization. The new authorization of $25 billion will bring its total buyback capacity to $32.24 billion, which represents about 14% of its current market value.
Nvidia also said it plans to increase its quarterly cash dividend by 7% to $0.04 per share, starting in the third quarter.
The company’s CEO, Jensen Huang, said that the buyback program reflects the company’s confidence in its future growth and its commitment to returning capital to shareholders.
“Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI,” Huang said in a statement. “This is driving a platform shift in software and enabling new, never before possible applications.”
Some analysts agreed that Nvidia’s buyback program was a positive move for the company and its shareholders, as it shows that the company is not resting on its laurels and is willing to reward its loyal investors.
“The results were a ‘drop the mic’ moment in our opinion that will have a ripple impact for the tech space for the rest of the year,” said Daniel Ives, analyst at Wedbush Securities. He added that Nvidia’s buyback program was “a clear sign of confidence” from Huang and his team.
“Nvidia is firing on all cylinders and we believe has a clear runway ahead for the next 12 to 18 months as it further cements its leadership position in AI and gaming,” Ives said.
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