On August 28, Wall Street held its breath as the world’s most important artificial intelligence company reported second-quarter earnings. And I’m talking about Nvidia (NASDAQ: NVDA)Of course. While each member of the “The Great Seven“It is seen as an indicator of the direction of all things AI, and Nvidia has emerged as perhaps the ultimate barometer of everything in the industry.
But fear not! Again, Nvidia silences skeptics After publishing another impressive earnings report. However, while digging into the financial and operational metrics, I came across an announcement that left me a bit confused.
Specifically, Nvidia’s board of directors approved an additional $50 billion in share repurchases (this is in addition to the $7.5 billion remaining from the previous repurchase program). There’s a general idea that share repurchases can be very favorable to investors. But in Nvidia’s case, I don’t get it.
Below, I’ll explain some of the reasons why I think Nvidia announced a buyback and why I don’t see the move as a reason to buy the stock right now.
Is Nvidia’s buyback a distraction?
One of Nvidia’s biggest announcements this year was the company’s 10-for-1 stock split, which occurred in June. Since early September 2022, Nvidia’s shares have risen more than 750%. With the stock price surpassing $1,000 per share, building a position in Nvidia has become a bigger hurdle for some investors.
Sometimes a company chooses to split its stock after these large increases in the stock price. Although a stock split does not necessarily change the market value of the company, the lower price adjusted for the split is often tangible Because it is less expensive and may inspire investors to buy. As a result, the stock may actually become more The company’s shares became more expensive after the split as more investors began to flock in.
But that’s not exactly the case with Nvidia stock. Since the stock began trading on a split basis on June 10, Nvidia stock is down about 2% (as of the market close on September 2). I admit that a 2% drop is not a reason to panic. However, I am a little surprised that the split didn’t spur a significant surge in buying activity and thus push Nvidia’s valuation to new highs.
To be honest, I see the buyback announcement as a PR stunt and an attempt to inspire investors.
Does Nvidia’s buyback make strategic sense?
Imagine watching a commercial where a celebrity you love promotes a product, only to discover later that the celebrity never used the product, but simply promoted it because they got paid to do so. That’s what’s happening with NVIDIA right now.
While adding more to the existing buyback initiative might give the impression that management views the stock as a good buy or even undervalued, it’s worth keeping in mind that insider selling has become a common occurrence at Nvidia over the past couple of months. Executives including Nvidia CEO Jensen Huang, COO Deborah Shoquist, and board members Mark Stevens and Tench Cox were selling shares when Nvidia’s stock was on the rise earlier in the summer.
But why should you buy Nvidia stock when the people who create shareholder value are spending their money in cash? This may be a harsh criticism, as Nvidia executives still own large amounts of stock — making their net worth closely tied to the company’s performance. However, I have some other concerns about the buyback.
While Nvidia is best known for its graphics processing units (GPUs), not long ago I wrote an article about how the company is deploying its record profits into growth initiatives outside its core semiconductor and data center businesses. Furthermore, looking at Nvidia’s closest competitor, Advanced Micro Devices AMD, which has made several notable acquisitions in the past two years alone, I think management will be motivated to double down on R&D, marketing, and other endeavors in the face of increased competition. I see these decisions as wiser, considering that Nvidia had to delay orders for its latest Blackwell GPUs due to a design flaw.
One final point I want to make is about competition outside of AMD. Nvidia is also facing increasing competition from its customers — particularly some members of the Magnificent Seven. The electric car maker Tesla Tesla relies heavily on Nvidia chips to develop its self-driving software. But recent statements from Elon Musk suggest that Tesla is looking to migrate away from Nvidia and possibly compete with the chip giant in the future. Moreover, both Amazon and Meta Companies are increasingly investing in capital expenditures, especially in some projects that revolve around designing their own semiconductor chips in-house.
Is Nvidia Stock a Good Buy Now?
If you look at Nvidia from a valuation perspective alone, the stock is a bargain right now. Based on its price-to-earnings (P/E) and price-to-free-cash-flow (P/FCF) ratios, Nvidia stock is less expensive today than it was even just a few years ago — and that’s with all this new revenue and earnings growth.
But I’m starting to worry that Nvidia is having a hard time identifying opportunities to allocate capital in a time of increasing competition. I won’t argue that investing in Nvidia is a disaster. I’ll leave the doomsday talk for another time.
But investors need to realize that Nvidia’s record growth in earnings and revenue will not last forever. Eventually, growth will normalize and will negatively impact Nvidia’s earnings. That’s why I find the $50 billion share buyback questionable and not a good reason to buy Nvidia stock at this time.
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Opinion: Nvidia’s $50 billion buyback plan isn’t a good enough reason to buy its stock. That’s what worries me. Originally posted by The Motley Fool