Nvidia’s (NVDA.O) surprise announcement of a $25 billion stock buyback has caught some investors off-guard, despite the company’s stock more than tripling this year and a robust second-quarter report.
Following its quarterly revenue forecast that surpassed expectations, Nvidia’s shares soared to a record high.
Fueled by the artificial intelligence boom and increased chip demand, the shares surged over 6% on Thursday.
However, the stock buyback, ranking fifth among U.S. repurchase announcements in 2023, left some investors puzzled.
Share repurchases are common strategies to return capital to shareholders, potentially boosting stock prices by reducing share supply and enhancing earnings per share.
While buybacks are usually welcomed when a company’s stock is undervalued, Nvidia’s shares have already surged around 220% this year, leading investors to question the rationale behind the move.
King Lip, Chief Strategist at Baker Avenue Wealth Management, expressed bewilderment, emphasizing that for a rapidly growing company like Nvidia, reinvesting earnings could be more favorable than buybacks.
Despite this sentiment, Nvidia’s management seems to believe their stock is undervalued, according to Daniel Morgan, Senior Portfolio Manager at Synovus Trust.
However, Nvidia’s buyback decision is met with mixed feelings.
Some find it perplexing to consider Nvidia as undervalued, given its stock’s high multiple of 45 times forward 12-month earnings estimates compared to the S&P 500’s 19 times.
Tom Plumb, CEO of Plumb Funds, noted that the collapsed Arm Holdings Ltd deal might be limiting Nvidia’s strategic options, pushing the company to decide how to allocate its excess cash.
Nvidia’s buyback, although sizable at $25 billion, represents only 2.1% of its nearly $1.2 trillion market value, falling short of the historical 2.58% buyback yield for the overall S&P 500.
Meanwhile, other tech giants like Apple, Alphabet, and Meta Platforms have announced even larger buybacks this year.
Tech companies often prefer buybacks over dividends to retain flexibility for pursuing growth opportunities.
The move is seen as a sign of confidence by some investors, while others would have preferred different uses for the cash.
Despite the mixed reactions, Nvidia’s decision to initiate a substantial buyback reflects the complex considerations faced by high-growth tech firms navigating their financial strategies.