Opinion: Nvidia’s $50 billion buyback isn’t a reason to buy the surrendered stock. This is what worries me.

On August 28, Wall Street held its breath as the world’s leading artificial intelligence (AI) company reported second-quarter earnings. I’m talking about Nvidia (NVDA -4.08%)Of course. While each member of the Magnificent Seven is seen as a pointer to the direction of all things AI, Nvidia has emerged as perhaps the industry’s ultimate barometer.

But fear not! Once again, Nvidia silenced them after posting yet another spectacular earnings report. However, while researching the financial and operational metrics, I came across an announcement that left me a little perplexed.

Namely, Nvidia’s board approved another $50 billion in share buybacks (this is on top of the $7.5 billion left over from a previous buyback program). There is a general idea that share buybacks can be quite favorable for investors. But with Nvidia, I just don’t get it.

Below, I’ll break down a few reasons why I think Nvidia announced the buyback, and why I don’t see this move as a reason to buy the stock right now.

Is the Nvidia buyback a distraction?

One of Nvidia’s biggest announcements this year was the company’s 10-for-1 stock split that took place in June. Since the start of September 2022, Nvidia shares are up more than 750%. As the stock price eclipsed $1,000 per share, building a position in Nvidia became more of an obstacle for some investors.

Sometimes a company will choose to split its stock following these significant increases in stock price. Although a stock split does not inherently change a company’s market capitalization, the lower adjusted price for the split is often charged as less expensive and can inspire investors to buy. As a result, a stock could actually become More expensive after a split as more investors start to enter.

That’s not exactly the case with Nvidia stock, though. Since the stock began trading on an adjusted basis on June 10, Nvidia shares are down about 2% (as of the market close on September 2). I admit that a 2% drop is not cause for panic. But that said, I’m a little surprised that the split didn’t inspire a noticeable uptick in buying activity and subsequently propel Nvidia’s valuation to new highs.

To be honest, I see the buyback announcement as somewhat of a PR stunt and an effort to re-inspire investors.

Image source: Getty Images

Does Nvidia’s buyout make strategic sense?

Imagine watching an ad where a celebrity you admire is endorsing a product, only to find out later that the celebrity never used the product and was simply promoting it because they were paid a fee to do so . In a way, that’s kind of what’s going on with Nvidia right now.

While adding to the existing buyback initiative might give the impression that management views the stock as a good buying opportunity or even undervalued, keep in mind that domestic sales have become all the rage at Nvidia over the past couple of 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 stock when Nvidia’s stock soared earlier this summer.

Why should you buy Nvidia stock when those responsible for generating shareholder value are cashing in? Perhaps that’s a harsh criticism because Nvidia executives still own large amounts of stock — making their net worth closely tied to business performance. However, I have other concerns about redemption.

Although Nvidia is best known for its graphics processing units (GPUs), not too long ago I wrote an article about how the company is parlaying its record profits into growth initiatives outside of its core semiconductor business and data centers. Furthermore, considering Nvidia’s closest competitor, Advanced microdevices (AMD), has made some notable acquisitions in just the last couple of years, I would think management would be motivated to double down on research and development, marketing and other efforts amid intensifying competition. I would see these as more prudent decisions considering Nvidia had to delay orders for the latest Blackwell GPUs due to a design flaw.

One last point I’d like to make is about the competition outside of AMD. Nvidia is also facing increasing competition from its own customers — particularly some of the Magnificent Seven. Manufacturer of electric vehicles (EV). adze relies heavily on Nvidia chips to develop self-driving software. But recent remarks by Elon Musk suggest that Tesla is looking to migrate away from Nvidia and perhaps compete with the chip giant in the future. Moreover, both Amazon and Meta are increasing capital expenditure (capex) investments, especially in some projects that revolve around designing their own in-house semiconductor chips.

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 a bargain right now. On a price-to-earnings (P/E) and price-to-cash-flow (P/FCF) basis, Nvidia stock is actually less expensive today than it was even a few years ago — and that’s despite everything. newfound revenue and profit growth.

NVDA Data ON Report by YCharts. PE ratio = price-earnings ratio.

But I’m beginning to have some concerns that Nvidia is hard-pressed to identify opportunities to allocate capital amid a period of increasing competition. I’m not going to make the case that investing in Nvidia is a disastrous choice. I’ll save the apocalypse talk for another time.

However, investors should realize that Nvidia’s record growth in the top and bottom lines won’t last forever. Eventually, growth will normalize and hurt Nvidia’s profits. For that reason, I find the $50 billion buyback questionable and not the only reason to pick up Nvidia stock right now.