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by Lewis Krauskopf, Chibuike Oguh and Lance Tupper
NEW YORK (Reuters) – The $25 billion (23.16 billion euros) share buyback announced by Nvidia caught some investors off guard, even as the group’s strong second-quarter results were hailed by the steps.
Nvidia’s share price hit a record high on Thursday, climbing more than 6% the day after the group’s quarterly earnings release, buoyed by demand for artificial intelligence (AI) chips.
Nvidia’s share buyback, the fifth-largest US company in 2023, according to EPFR, on the other hand, surprised some investors.
Companies typically buy back their shares to return capital to shareholders, and buybacks can support prices by reducing supply and increasing demand, while supporting earnings per share, a widely tracked measure.
But while shareholders view share buybacks as an encouraging sign when the price is cheap, Nvidia’s stock has rallied nearly 220% in 2023.
“It’s a little disconcerting,” said King Lip, chief strategist at Baker Avenue Wealth Management, which manages $2.5 billion in assets and counts Nvidia among its top ten positions.
“As shareholders, we appreciate share buybacks, but for a company like Nvidia that is growing so rapidly, we would prefer to see its earnings reinvested,” King Lip added.
Unlike companies whose financial performance grows little and who turn to share buybacks to increase their earnings per share, Nvidia’s announcement “comes a surprise” given that it is a “technology group growth,” adds Daniel Morgan, senior portfolio manager at Synovus Trust, which owns Nvidia stock.
“The message seems to be that (Nvidia’s) management thinks its stock is undervalued,” said Daniel Morgan.
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For some investors, that Nvidia is “undervalued” is a tough message to digest: According to Refinitiv Datastream, Nvidia’s stock was trading on Wednesday at 45 times forward 12-month earnings, compared to 19 times for the entire industry. S&P 500 index.
“Historically, we appreciate a company being able to buy back its shares when they are down, but I don’t think we can say that this is the case with Nvidia today”, judge Tom Plumb, CEO and manager core portfolio of Plumb Funds, one of whose top positions is Nvidia.
However, according to Tom Plumb, Nvidia may find it difficult to deploy its financial resources otherwise, after its deal to buy semiconductor designer Arm fell through last year.
“The company is generating incredible amounts of cash, far more than it needs for its current investment strategy, and it is prohibited from buying important complementary businesses. So what can it do with its money?” asks Tom Plumb.
Nvidia spent about 27% of its revenue on research and development last year, in line with industry practices. The company did not immediately respond to a request for comment.
In its second-quarter earnings release on Wednesday, Nvidia said its board approved $25 billion in additional stock repurchases “without a deadline” and that the company plans to continue its repurchases in during the fiscal year. Despite the amount of the buyout, it only represented 2.1% of the group’s capitalization, of nearly 1.2 trillion dollars, as of Wednesday. According to Howard Silverblatt, indices analyst at S&P Dow Jones Indices, this figure is lower than the average amount of 2.58% for the entire S&P 500.
Several other big tech and growth companies have announced even larger takeovers this year: Apple announced a $90 billion takeover, Alphabet announced $70 billion, and Meta Platforms announced $40 billion.
Tech companies tend to prefer using their cash for share buybacks rather than paying dividends, because “if they have to pay a dividend every quarter, it can hamper their ability to take advantage of growth opportunities,” says Daniel Klausner, head of US listed equity advisory at Houlihan Lokey.
Some investors actually welcomed Nvidia’s share buyback decision.
“It’s a show of confidence,” said Francisco Bido, senior portfolio manager for F/M Investments’ large-cap fund, which owns Nvidia stock. “If they had a better way to use their cash, I’m pretty sure they would have.
(Reporting Lewis Krauskopf, Chibuike Oguh and Lance Tupper in New York, additional reporting Echo Wang in New York and Stephen Nellis in San Francisco, French version Corentin Chapron, editing by Kate Entringer)
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