On August 28, Wall Street held its breath as the world’s most important artificial intelligence (AI) company reported second-quarter earnings. I’m talking about Nvidia (NASDAQ: NVDA)confident. While each member of the “Magnificent Seven” is seen as an indicator for the direction of all AI, Nvidia has emerged as the industry’s ultimate barometer.
But fear not! Once again, Nvidia is putting doubters to rest after delivering another spectacular earnings report. However, while combing through the financial and operating metrics, I came across one announcement that puzzled me.
Namely, Nvidia’s board of directors approved an additional $50 billion in share buybacks (this is $7.5 billion more than the previous buyback program). There is a general understanding that stock buybacks can be good for investors. But in Nvidia’s case, I just don’t know.
Below, I’ll break down some of the reasons why Nvidia announced the buyback and why I don’t see this move as a reason to buy the stock right now.
Is Nvidia’s buyback a distraction?
One of Nvidia’s bigger announcements this year was the company’s 10-for-1 stock split, which took place in June. Since the beginning of September 2022, Nvidia shares have increased by more than 750%. When the stock price exceeds $1,000 per share, building a position in Nvidia becomes more of an obstacle for some investors.
Sometimes, the company will choose to split the stock after the increase in the stock price. Although stock splits do not change the company’s market capitalization, the split-adjusted price is often lower felt as less expensive and can inspire investors to buy. As a result, stocks can be apart expensive after the split as a larger body of investors began to pour in.
This is not exactly the case with Nvidia stock. Since the shares began trading on a split-adjusted basis on June 10, Nvidia stock has declined by about 2% (as the market closed on September 2). I will admit that a 2% drop is no reason to panic. But with that said, I’m a little surprised that the split didn’t inspire buying activity and drive Nvidia’s stock to new highs.
To be honest, I see the announcement of the buyback as a PR stunt and an attempt to re-inspire investors.
Does buying back Nvidia make strategic sense?
Imagine watching an ad where a celebrity you like endorses a product, only to find out later that the celebrity never used the product and was just promoting it because they were paid. In a way, that’s what’s happening with Nvidia right now.
While adding an existing buyback initiative can give the impression that management sees the stock as a good buying opportunity or even undervalued, keep in mind that insider selling has been all the rage at Nvidia in recent months. Executives, including Nvidia CEO Jensen Huang; executive vice president of operations, Debora Shoquist; and board members Mark Stevens and Tench Coxe were all selling shares when Nvidia shares were riding high earlier in the summer.
Why should you buy Nvidia stock when those responsible for generating shareholder value are already paying for it? Perhaps this is a harsh criticism, as Nvidia executives still own a large amount of stock – making their net worth inextricably linked to the performance of the business. However, I have another problem with repurchasing.
While Nvidia is best known for its graphics processing units (GPUs), not long ago, I wrote about how the company is deploying record profits to growth initiatives outside of its core semiconductor and data center businesses. Also, consider Nvidia’s closest competitor, Advanced Micro Devices (AMD), has made several notable acquisitions over the past few years, I think management will be motivated to increase research and development, marketing, and other efforts amid increased competition. I’ll look at the wiser decision, as Nvidia had to delay orders on the latest Blackwell GPUs due to design flaws.
One final point I would like to make is the competition outside of AMD. Nvidia is also facing increased competition from its own customers – particularly some members of the Magnificent Seven. Electric vehicle (EV) manufacturers. Tesla relies heavily on Nvidia chips to develop autonomous driving software. But recent comments from Elon Musk suggest Tesla is looking to move away from Nvidia and may compete with the chip giant in the future. In addition, two Amazon and Meta increased investment in capital expenditure (capex), specifically in some projects that design semiconductor chips in-house.
Is Nvidia stock a good buy right now?
If you look at Nvidia purely from a valuation perspective, there’s an argument to be made that the stock is currently a bargain. On a price-to-earnings (P/E) and price-to-free cash flow (P/FCF) basis, Nvidia stock is actually cheaper than it was just a few years ago — and all of this. new revenue met and profit growth.
But I began to have some concerns that Nvidia is hard-pressed to identify opportunities to allocate capital in the middle of a period of rising competition. I would not consider that investing in Nvidia is a risky choice. I’ll save the apocalypse for another time.
However, investors should be aware that Nvidia’s record growth on the top and bottom lines will not last forever. Eventually, growth will normalize and reduce Nvidia’s profits. Therefore, I find the $50 billion buyback questionable and not the only reason to pick up Nvidia stock now.
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Randi Zuckerberg, former Facebook director of market development and spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions and recommends Amazon, Meta Platform, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
Opinion: Nvidia’s $50 Billion Buyback Is No Reason to Buy Stock Hand Over Fist This Is What I Concerned. this was originally published by The Motley Fool
