Nvidia’s $50 billion share buyback is an extremely bad decision that sends the wrong message to Wall Street and investors

Since the advent of the Internet in the mid-1990s, investors have waited patiently for the next big innovation to emerge that could significantly alter the growth trajectory for corporate America. The rise of artificial intelligence (AI) may be the answer.

Last year, analysts at PwC 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 this forecast is close to reality, it suggests that a multitude of companies could become big winners of the AI ​​revolution.

So far, no company has been a bigger beneficiary of the rise of AI than Nvidia (NVDA 1.51%) — but that doesn’t mean Wall Street’s darling AI has made all the right moves.

Image source: Getty Images.

Nvidia has quickly become the AI ​​hardware mainstay of the enterprise data center

Almost since the green flag waved, Nvidia’s graphics processing units (GPUs) have been the go-to choice in AI-accelerated data centers. Based on estimates from semiconductor analyst firm TechInsights, 2.67 million GPUs and 3.85 million GPUs were shipped for use in enterprise data centers in 2022 and 2023, respectively. Nvidia has accounted for all but 30,000 (in 2022) and 90,000 (in 2023) of these GPU shipments.

Controlling about 98% of the market for GPUs used to oversee generative AI solutions and train large language models (LLMs) has given Nvidia phenomenal pricing power for its game-changing chips. because Advanced microdevices sells its MI300X AI-GPU for between $10,000 and $15,000, Nvidia’s H100 GPU briefly topped $40,000 earlier this year. The overwhelming demand, coupled with the clear shortage of GPUs, led to a meltdown in Nvidia’s adjusted gross margin.

The company’s CUDA software platform has played a key role in keeping companies loyal to its products and services. CUDA is the toolset that developers use to build 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 how strong demand has been for its ecosystem of solutions. Net sales rose 122% to exceed $30 billion for the quarter, while net income of $16.6 billion (up 168% year-over-year) once again beat analysts’ expectations.

But not every decision made by Nvidia’s management team was arguably the right one.

Nvidia’s $50 billion share buyback authorization sends the wrong message to shareholders

Let me preface this discussion without hiding 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 goliath. While I recognize that AI has long-term mass appeal, I maintain that AI is a technology that needs time to mature. I also strongly believe that competitive pressures will steadily chip away at the otherworldly GPU pricing power that Nvidia has enjoyed.

But my criticism of Nvidia as an investment and as a company has a whole new focus today: the $50 billion share buyback program authorized by its board, as outlined in the company’s second-quarter report. That $50 billion comes on top of the $7.5 billion left over from its previous share buyback program.

Most companies authorize share buybacks for two reasons. First, companies with flat or growing net income that buy back their stock will often see an increase in earnings per share (EPS). 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 share buybacks is to demonstrate to investors that it thinks its stock is a business.

While Nvidia’s $50 billion share buyback authorization is likely aimed at boosting EPS and instilling confidence in its stock sends completely the wrong message to Wall Street and shareholders for three reasons.

NVDA stock sold by internal data by YCharts.

1. Nvidia insiders are selling at a torrid pace

The first glaring flaw in this plan is that insider selling activity has never been more pronounced. Between mid-June and mid-August, CEO Jensen Huang sold 4.8 million shares of his company’s stock in 20 trading sessions, totaling nearly $580 million.

Furthermore, the last time an Nvidia insider bought a single share of their company’s stock on the open market was December 2020.

The company’s board of directors just authorized a massive buyback amid an unprecedented period of internal sales activity that totaled $1.6 billion in the 12-month period. What kind of message does this send when insiders won’t buy 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 share buyback authorization is an epically bad decision by Nvidia is that it ended its fiscal second quarter with “only” $34.8 billion in cash, cash equivalents and securities of tradable value in the treasury.

To be fair, Nvidia has been a positive cash flow machine in recent quarters, and the company’s share buyback program does not have an end date. However, $50 billion is more of a pie-in-the-sky target than something that can actually be achieved anytime soon.

I’ll also add to this point that $50 billion in share buybacks at Nvidia’s closing price on August 29th would only reduce the number of shares outstanding by 1.62%! That’s it a lot of money to have virtually no impact on EPS.

Image source: Getty Images.

3. Can’t Nvidia find a better use for $50 billion while on top of the hottest innovation?

Finally, it’s almost unfathomable that Nvidia is targeting up to $50 billion in additional share buybacks when it’s (for now) leading the charge in data center AI hardware.

To maintain computing advantages in AI-accelerated data centers, Nvidia will need to invest aggressively in research and development. Although the launch of the next-gen Blackwell GPU architecture is nearing, and CEO Jensen Huang recently teased the Rubin platform, which will be released in 2026, you’d think that a game changer like Nvidia could find a better use for 50 billion of dollars. innovative side than just repurchasing its stock to perhaps boost its quarterly EPS by a few pennies.

With chipmakers’ capacity constraints slowing Nvidia’s expansion — Nvidia has no fables and outsources its chip manufacturing — I’d think a much better use for $50 billion would be finding ways to reduce or remove these supply chain restrictions. Acquiring additional capacity or building manufacturing facilities to address these issues would make much more sense than a $50 billion buyback program that effectively signals that the board and management team have no better ideas.

It’s looking increasingly likely that Nvidia’s best days are in the rearview mirror.