Nvidia’s $25 billion buyback leaves some shareholders ‘scratching their heads’

NEW YORK, Aug 25 (Reuters) – Nvidia’s ( NVDA.O ) shares have more than tripled this year after its $25 billion share buyback has impressed some investors. .

Shares of Nvidia hit a record high on Thursday, as an artificial intelligence boom fueled demand for its chips and the company blew past expectations with its quarterly earnings forecast. Shares of Nvidia, which rallied in the days leading up to its report, rose more than 6% on Thursday, but were little changed by the end of the day.

However, according to EPFR, Nvidia’s share buyback — the fifth-largest buyback announcement among U.S. companies this year — surprised some investors.

Companies typically buy back their stock as a way to return capital to shareholders. Such buybacks can benefit a share’s price by reducing its supply and increasing demand, and can increase earnings per share, a metric investors are closely watching.

But when a company’s stock looks cheap and shareholders see an encouraging sign of a pullback, Nvidia’s shares have soared 220% in 2023, leaving investors looking for reasons for the company’s action.

“It’s a bit of upside,” said King Lip, chief strategist at Baker Avenue Wealth Management, which has $2.5 billion in assets under management and considers Nvidia a top-10 holding.

“As a shareholder, we’d like to see the stock buy back, but with a company like Nvidia that’s growing so fast, you want to see their earnings plowed back into the company,” Lipp added.

As opposed to companies with sluggish financial performance growth, Nvidia’s announcement is “surprising” to help boost earnings per share, “they’re a hot growth technology name,” said senior portfolio manager Daniel Morgan. In Synovus Trust, which owns Nvidia shares.

“(Nvidia’s) management seems to believe their stock is undervalued,” Morgan said.

Creating money

For some investors, the “undervalued” Nvidia may be hard news to stomach. Nvidia shares traded at 45 times trailing 12-month earnings estimates as of Wednesday, compared with about 19 times for the overall S&P 500 (.SPX), according to Refinitiv DataStream.

“Historically, when a company is depressed, you like it if you can buy back its stock, but I don’t think anyone can say it’s in a depressed spot right now,” CEO Tom Plumb said. and lead portfolio manager at Plumb Funds, which holds Nvidia as one of its largest holdings.

However, after a deal to buy semiconductor designer arm Holdings Ltd. collapsed last year amid regulatory concerns, Plumb said the company could deploy its resources.

“They generate an incredible amount of cash beyond what their current investment strategy requires, and they are prohibited from buying significant complementary businesses,” Plumb said. “So what are they going to do with their money?”

In line with rival chip companies, Nvidia spent about 27% of revenue on research and development last year.

The company did not immediately respond to a request for comment.

In its second-quarter earnings release on Wednesday, Nvidia said its board had approved an additional $25 billion in share repurchases “without expiration” and that the company plans to continue repurchasing this fiscal year.

Despite the staggering dollar amount, as of Wednesday, Nvidia’s buyback represented just 2.1% of its nearly $1.2 trillion market value. That’s lower than the 2.58% return yield for the S&P 500 as a whole over a one-year period, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Meanwhile, several megacap technology and growth companies have announced even bigger acquisitions this year: Apple ( AAPL.O ) at $90 billion, Alphabet ( GOOGL.O ) at $70 billion and Meta Platforms ( META.O ) at $40 billion.

Tech companies prefer to return cash rather than dividends because “if they’re scrambling for dividends every quarter, it can hinder their ability to take advantage of growth opportunities,” said Daniel Klausner, head of U.S. public equity consulting at Houlihan. Loki.

In fact, some investors welcomed Nvidia’s buyback decision.

“It’s a show of faith,” said Francisco Bito, senior portfolio manager at F/M Investments, a large-cap focused fund that owns Nvidia shares. “I’m sure they would have done it if they had put (the money) to good use.”

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