In an unexpected move that raised eyebrows among investors, Nvidia (NVDA.O) announced a massive $25 billion stock buyback after its shares skyrocketed by over 220% this year alone. The company’s decision came hot on the heels of a remarkable second-quarter report that far exceeded expectations.
Stock Reaches an All-Time High
Following the announcement, Nvidia’s stock surged to an all-time high, riding the wave of a booming artificial intelligence sector that has led to a surging demand for its chips. The company’s shares experienced a more than 6% increase on Thursday, although the gains were tempered, resulting in a relatively unchanged closure for the day.
While stock buybacks are a common method for companies to allocate capital back to shareholders and bolster stock prices by reducing the available shares, Nvidia’s decision to go ahead with such a move at a time when its stock is performing exceptionally well left some investors puzzled. Market analysts and experts weighed in, pointing out that typically buybacks are embraced by shareholders when a company’s stock is undervalued, but Nvidia’s shares have been on an astonishing upward trajectory throughout 2023.
The unexpected buyback also led to discussions about how Nvidia might deploy its considerable resources, particularly after the collapse of its deal to acquire Arm Holdings Ltd due to regulatory concerns. With the company generating substantial cash and limited options for strategic investments, the decision to funnel capital into repurchasing its own shares has prompted questions about its growth strategy.
Nvidia’s move seems to carry the message that the company’s management perceives its stock to be undervalued despite its remarkable performance. However, this perspective has been met with skepticism by some investors who argue that, given Nvidia’s forward-looking price-to-earnings ratio and its current market value, it’s hard to make a case for the stock being undervalued.
On the other hand, some investors welcomed the buyback as a demonstration of confidence from Nvidia’s management. Francisco Bido, a senior portfolio manager at F/M Investments, noted that if the company had better uses for its cash, it would have pursued them instead.
Nvidia’s buyback, although substantial in amount, represents only about 2.1% of the company’s nearly $1.2 trillion market value, which falls short of the historical average buyback yield of 2.58% for the broader S&P 500 index. In comparison, several other major technology and growth companies, including Apple, Alphabet, and Meta Platforms, have announced even larger buybacks this year.
Tech giants often favor buybacks over dividends due to their potential to hinder seizing growth opportunities if they are obligated to distribute dividends regularly. This strategy allows companies to remain agile and invest in potential expansions or innovations.