On August 28, Wall Street held its breath as the world’s largest artificial intelligence (AI) company announced its second-quarter earnings. Nvidia (NASDAQ: NVDA)Of course. While each member of the Magnificent Seven is seen as a bellwether for the direction of all things AI, Nvidia has emerged as perhaps the industry’s ultimate barometer.
But fear not. Nvidia has once again silenced the skeptics after releasing another spectacular earnings report. However, as I was looking at the financial and operational metrics, I came across an announcement that left me a little perplexed.
Specifically, Nvidia’s board of directors approved an additional $50 billion worth of share buybacks (on top of the remaining $7.5 billion from a previous buyback program). There’s a common perception that share buybacks can be quite investor-friendly, but in Nvidia’s case, I just don’t get it.
Below I’ll break down a few reasons why I believe Nvidia announced the buyback and why I don’t see this move as a reason to buy shares right now.
Is Nvidia’s share 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 the beginning of September 2022, Nvidia stock has risen by more than 750%. As the stock price eclipsed $1,000 per share, building a position in Nvidia became a hurdle for some investors.
Sometimes a company chooses to split its stock following these significant increases in share price. Although a stock split does not inherently change a company’s market capitalization, the lower split-adjusted price is usually perceived as cheaper and can inspire investors to buy. As a result, a stock could become really further expensive after a split as more investors start to arrive.
That’s not exactly the case with Nvidia stock, though. Since the stock began trading on a split-adjusted basis on June 10, Nvidia stock has fallen about 2% (as of market close on September 2). I’ll concede that a 2% drop isn’t a cause for panic. But that said, I’m a little surprised that the split hasn’t inspired a noticeable uptick in buying activity and subsequently pushed Nvidia’s valuation to new highs.
To be honest, I see the buyback announcement as a kind of PR stunt and an effort to re-inspire investors.
Does Nvidia buyback make strategic sense?
Imagine seeing an ad where a celebrity you admire is promoting a product, only to find out later that the celebrity has never used the product and is simply promoting it because they were paid to do so. In a way, that’s what’s happening with Nvidia right now.
While adding to the existing buyback initiative may give the impression that management views the stock as a good buying opportunity or even undervalued, keep in mind that insider selling has become all the rage at Nvidia over the past few months. Executives including Nvidia CEO Jensen Huang; executive vice president of operations Debora Shoquist; and board members Mark Stevens and Tench Coxe were selling shares when Nvidia stock was on a tear earlier in the summer.
Why should I buy Nvidia stock when those responsible for generating shareholder value are getting paid? That may be a harsh criticism, since Nvidia executives still own large chunks of stock, making their net worth closely tied to business performance. However, I have other concerns regarding 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 using its record profits on growth initiatives outside of its core semiconductor and data center businesses. Also, considering Nvidia’s closest competitor, Advanced Microdevices (AMD), has made several notable acquisitions in recent years, I think management would be motivated to double down on R&D, marketing, and other initiatives amid intensifying competition. I view those decisions as more prudent, considering Nvidia had to delay orders for its newest Blackwell GPUs due to a design flaw.
One final point I’d like to mention concerns competition outside of AMD. Nvidia is also facing increasing competition from its own customers, particularly some of the members of the Magnificent Seven. Electric Vehicle (EV) Manufacturer Tesla Tesla relies heavily on Nvidia chips to develop self-driving software. But recent comments from Elon Musk suggest that Tesla is looking to move away from Nvidia and perhaps compete with the chip giant in the future. Moreover, both Amazon and Goal are increasing capital expenditure (Capex) investments, specifically in some projects that revolve around the design of their own in-house semiconductor chips.
Is Nvidia stock a good buy right now?
If we look at Nvidia from a purely valuation perspective, it can be argued that the stock is a bargain right now. In terms of price-to-earnings (P/E) and price-to-free cash flow (P/FCF), Nvidia stock is actually less expensive today than it was just a few years ago, and that’s with all this new revenue and earnings growth.
But I am starting to have some concerns about the fact that Nvidia is having a hard time identifying opportunities to allocate capital amid a period of increasing competition. I’m not going to float the idea that investing in Nvidia is a disastrous decision. I’ll save the doomsaying for another time.
However, investors should realize that Nvidia’s record growth in top and bottom lines won’t last forever. Over time, the growth will normalize and impact Nvidia’s earnings. For that reason, I find the $50 billion buyback questionable and not a good enough reason to buy Nvidia stock right now.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions with Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions with and recommends Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
Opinion: Nvidia’s $50 billion buyback is no reason to buy shares wildly. Here’s what worries me. Originally published by The Motley Fool