Here’s why Nvidia’s new $50 billion buyback may bolster the stock’s bearish case

Nvidiahis (NVDA -6.39%) The fiscal second quarter earnings report is out and it looks like the chip maker is making massive amounts of cash. Revenue for the period was $30 billion, up 122% year over year. Moreover, earnings per share increased by 168% to $0.67. Additionally, free cash flow for the quarter was approximately $13.5 billion, up from approximately $6.0 billion in the year-ago period.

“NVIDIA achieved record revenue as global data centers accelerate to modernize the entire compute stack with accelerated computing and generative AI,” Nvidia founder and CEO Jensen Huang said in the company’s quarterly report.

All of these are great. But in the context of Nvidia’s nearly $3 trillion market cap, it’s not nearly as impressive. Herein lies the problem with Nvidia stock: The valuation may just be a little ahead of itself. A telling way to further highlight this is to take a look at the company’s share buyback program and view it next to its massive market cap.

Everything is relative

Nvidia bought back $15.4 billion worth of its stock over the past two quarters. That would leave $7.5 billion in authorized cash for further buybacks, except the company just announced that its board has authorized another $50 billion in buybacks.

Sure, $50 billion is a huge amount. But it’s a bit small in the context of Nvidia’s roughly $3 trillion market cap. Even when you add in the $7.5 billion it still has from its previous program, the total remaining cash authorized for buybacks amounts to less than 2% of Nvidia’s market cap.

Compare that to the $60 billion authorization Apple (AAPL 1.46%) announced when it got serious about share buybacks in 2013. That amounted to nearly 16 percent of the company’s shares outstanding at the time. Fast forward to Apple’s first full quarter after that authorization, and the company spent $11 billion to buy back its stock. And what was Apple’s market cap at the time? About 400 billion dollars. In contrast, Nvidia spent only about $7.2 billion in its most recent quarter buying back stock, even though the company’s market cap stands at about $3 trillion today.

In a final comparison to Apple, Nvidia’s cash, cash equivalents and marketable securities currently total $34.8 billion, or just over 1% of the company’s market cap; however, Apple’s cash at the time it got serious about buybacks was $147 billion, or more than a third of its market capitalization.

In short, Nvidia’s poor buyback program (and the cash balance to back it up) relative to its market cap certainly draws attention to the fact that its valuation may be a bit inflated.

Doubtful moment

The other problem with Nvidia’s buyback program is timing. Given that the stock trades at around 55 times earnings, the stock may have already been priced steadily higher for this cyclical business. Buying back shares at a potentially fair or overvalued price is not always in the best interests of shareholders. Nvidia might be better off holding on to cash and buying back its stock if it were available at a better price — a price that looks like a clear discount to a conservative estimate of the stock’s intrinsic value.

Of course, Nvidia’s business performance deserves applause. It’s incredible how the company has innovated and executed to capitalize on the demand for AI-powered products and services. In addition, the growth rate and profitability of the company is astounding. However, none of this addresses the key concern that investors should have: valuation.

Sure, it’s possible for the company to easily grow in its valuation. But the cyclical nature of the semiconductor business and the industry’s long history of intense competition warrant caution at the current share price.