Since the advent of the Internet in the mid-1990s, investors have been waiting patiently for the next big innovation that could significantly alter the growth trajectory of American companies. The arrival of artificial intelligence (AI) could be the answer.
Last year, PwC analysts released a report (“Sizing the Prize”) that estimated that the combined consumer benefits and productivity gains from AI would add $15.7 trillion to the global economy by 2030. If that forecast is close to reality, it suggests that a host of companies could emerge as the big winners of the AI revolution.
So far, no company has benefited more from the rise of AI than Nvidia (NASDAQ: NVDA) — but that doesn’t mean Wall Street’s AI darling made all the right decisions.
Nvidia has quickly become the kingpin of AI hardware for enterprise data centers
Since the green flag was raised, Nvidia’s graphics processing units (GPUs) have become the preferred choice for AI-accelerated data centers. According to estimates from semiconductor analyst firm TechInsights, 2.67 million and 3.85 million GPUs were shipped for use in enterprise data centers in 2022 and 2023, respectively. Nvidia accounted for all but 30,000 (in 2022) and 90,000 (in 2023) of those GPU shipments.
Controlling roughly 98% of the market for GPUs used to oversee generative AI solutions and train large language models (LLMs) has given Nvidia phenomenal pricing power over its breakthrough chips. Advanced Micro Devices Nvidia sells its AI MI300X GPU for $10,000 to $15,000, Nvidia’s H100 GPU briefly topped $40,000 earlier this year. The overwhelming demand, coupled with a clear GPU shortage, has led to a meltdown in Nvidia’s adjusted gross margin.
The company’s CUDA software platform has also played a key role in building enterprise loyalty to its products and services. CUDA is the toolkit that developers use to create LLMs and maximize the potential of their Nvidia GPUs.
Nvidia’s fiscal second-quarter operating results, which detail its business from April 29 to July 28, demonstrate just how strong demand has been for its ecosystem of solutions. Net sales rose 122% to more than $30 billion for the quarter, while net income of $16.6 billion (up 168% year over year) once again exceeded analyst expectations.
But not all decisions made by Nvidia’s management team are necessarily the right ones.
Nvidia’s $50 Billion Share Buyback Authorization Sends Wrong Message to Shareholders
Let me start this discussion by making no secret of the fact that I have been a harsh critic of Nvidia’s valuation and its historic rise from a $360 billion market cap to a $3 trillion behemoth. While I acknowledge that AI has massive long-term appeal, I stand by my thesis that AI is a technology that needs time to mature. I also firmly believe that competitive pressures will gradually erode the supernatural GPU pricing power that Nvidia has enjoyed.
But my critique of Nvidia as an investment and a company has a whole new dimension today: the $50 billion share repurchase program authorized by its board of directors, as reported in the company’s second-quarter report. That $50 billion is on top of the $7.5 billion left over from its previous share repurchase program.
Most companies allow share repurchases for two reasons. First, companies with stable or growing net income that repurchase their shares will often see their earnings per share (EPS) increase. In other words, net income is divided into fewer shares outstanding, resulting in higher EPS, which can make a company’s stock more attractive to fundamentally focused investors.
The other reason a company’s board of directors authorizes stock buybacks is to demonstrate to investors that it considers its stock to be a good deal.
As Nvidia’s $50 billion share buyback authorization likely aims to boost EPS And By inspiring confidence in its actions, it sends a completely wrong message to Wall Street and shareholders for three reasons.
1. Nvidia Insiders Are Selling at a Frenzied Pace
The first glaring flaw in the plan is that insider selling has never been more pronounced. Between mid-June and mid-August, CEO Jensen Huang sold 4.8 million shares of his company over 20 trading days, for a total of nearly $580 million.
Additionally, the last time an Nvidia insider purchased a single share of their company on the open market was in December 2020.
The company’s board just authorized a massive share buyback during a period of unprecedented insider selling activity that has totaled more than $1.6 billion over the past 12 months. What kind of message does it send when insiders aren’t buying a single share on the open market, but the board wants you to believe that the company’s stock is still a good value?
2. The company has only $34.8 billion in cash, cash equivalents and marketable securities
Another reason why this $50 billion stock repurchase authorization is an extremely bad move on Nvidia’s part is that the company ended the fiscal second quarter with “only” $34.8 billion in cash, cash equivalents, and marketable securities in its treasure chest.
To be fair, Nvidia has been generating positive cash flow in recent quarters, and the company’s stock buyback program has no end date. Still, $50 billion is more of a pipe dream than a realistic goal in the near future.
I’ll also add that $50 billion in stock buybacks at Nvidia’s August 29 closing price would only reduce its number of shares outstanding by (drum roll) 1.62%! a lot of money have virtually no impact on BPA.
3. Nvidia can’t find a better use for $50 billion while being at the forefront of the hottest innovation?
Finally, it’s almost incomprehensible that Nvidia is targeting up to $50 billion in additional stock buybacks when it’s leading the charge (for now) in data center AI hardware.
To maintain its lead in AI-accelerated data center computing, Nvidia will need to invest heavily in research and development. While the launch of its next-generation Blackwell GPU architecture is imminent and CEO Jensen Huang recently teased the Rubin platform, which will be released in 2026, you might think that a game-changer like Nvidia could find a better use for $50 billion on the innovation front than simply buying back its stock to, perhaps, increase its quarterly EPS by a few cents.
Capacity constraints at chipmakers are slowing Nvidia’s expansion (Nvidia is fabless and outsources its chip production), and I think a much better use of $50 billion would be to find ways to reduce or eliminate these supply chain constraints. Acquiring additional capacity or building fabs to address these issues would make much more sense than a $50 billion buyback program that effectively signals that the board and management team don’t have any better ideas.
It’s looking increasingly likely that Nvidia’s best days are behind us.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
Nvidia’s $50 Billion Stock Buyback Is a Terribly Bad Move That Sends the Wrong Message to Wall Street and Investors was originally published by The Motley Fool
