Analysis – Nvidia’s $25 billion buyback is “surprising” to some shareholders

Analysis - Nvidia's $25 billion buyback is "surprising" to some shareholders

Written by Louis Krauskopf, Chipwicki Ugoh, and Lance Topper

NEW YORK (Reuters) – Nvidia’s move to buy back $25 billion of its shares after its shares more than tripled this year has surprised some investors, even as they rejoiced at its impressive second-quarter report.

Nvidia shares hit a record high on Thursday, a day after the company beat expectations with its quarterly revenue forecast, as the artificial intelligence boom fueled demand for its chips. Nvidia shares, which had rallied in the days leading up to its report, rose more than 6% on Thursday but pared gains to end the day little changed.

However, Nvidia’s stock buyback — the fifth-largest buyback announcement among US-based companies this year, according to EPFR — surprised some investors.

Companies typically buy back their shares as a way to return capital to shareholders. These buybacks can benefit the share price by reducing the supply of shares and increasing demand, and can boost earnings per share, a metric closely watched by investors.

But while shareholders often view buybacks as an encouraging sign when a company’s stock looks cheap, Nvidia shares have risen nearly 220% in 2023, leaving investors searching for reasons behind the company’s move.

“It’s somewhat bewildering,” said King Leap, chief strategist at Baker Avenue Wealth Management, which has $2.5 billion in assets under management and counts Nvidia among the top 10 owned companies.

“As a shareholder, we’d like to see share buybacks, but for a company like Nvidia that’s growing so fast, you kind of want to see the profits back into the company,” Leib added.

Daniel Morgan, senior portfolio manager, said that unlike companies suffering from sluggish financial performance growth that resort to buybacks to help prop up earnings per share, Nvidia’s announcement “comes as a surprise” given that it is “a fast-growing technology name.” In Synovus Trust, which owns Nvidia shares.

“The message appears to be that (Nvidia) management believes its shares are undervalued,” Morgan said.

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For some investors, Nvidia’s “undervalued” might be a tough message on the stomach. Nvidia shares traded at 45 times earnings estimates for the 12-month period as of Wednesday compared to about 19 times for the entire S&P 500, according to Refinitiv Datastream.

“Historically, you would love for a company to be able to buy back its stock when it’s in a recession, but I don’t think anyone can prove that it’s in a recession right now,” said Tom Plumb, chief executive. and Principal Portfolio Manager at Plumb Funds, of which Nvidia is one of its largest holdings.

However, Plumb said, the company may be limited in how it deploys its resources after its deal to buy semiconductor designer Arm Holdings Ltd collapsed last year amid regulatory concerns.

“They generate an incredible amount of cash, more than they need for their current investment strategy, and they are prevented from buying large complementary businesses,” Plumb said. “So what are they going to do with their money?”

Nvidia spent about 27% of its revenue on research and development last year, in line with competing chip companies.

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

In its second-quarter earnings release on Wednesday, Nvidia said its board of directors approved an additional $25 billion worth of stock buybacks “without expiration,” and that the company plans to continue with buybacks this fiscal year.

Despite the staggering dollar amount, Nvidia’s buyback is only 2.1% of its $1.2 trillion market value, or buyback yield, as of Wednesday. That’s less than the historic buyback yield of 2.58% for the entire S&P 500 index, when looking at one-year periods, according to Howard Silverblatt, chief index analyst at S&P Dow Jones Indexes.

Meanwhile, several other tech and growth giants have announced bigger buybacks this year: Apple at $90 billion, Alphabet at $70 billion and Meta Platforms at $40 billion.

Daniel Klausner, head of US public equity advisory at Houlihan, said tech companies tend to prefer using cash for buybacks over dividends, because “if they’re on the hook for taking a dividend every quarter, it could hinder their ability to take advantage of opportunities.” the growth”. Loki.

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

“It’s a show of confidence,” said Francisco Bido, senior portfolio manager at large-cap focused fund F/M Investments, which owns Nvidia shares. “If they had a better use (of the money), I’m sure they would,” he added.

(Reporting by Louis Krauskopf, Chebuiki Ugoh and Lance Topper in New York; additional reporting by Eko Wang in New York and Stephen Nelis in San Francisco; Editing by Ira Iosebashvili and Matthew Lewis)

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