Nvidia’s $50 billion share buyback is the ultimate smoke and mirrors campaign

For the better part of two years, artificial intelligence (AI) has been the hottest thing since sliced ​​bread on Wall Street. The prospect of learning AI-based software and systems without human intervention gives this technology broad utility in almost every sector and industry.

While we’ve seen no shortage of future trends on Wall Street since the advent of the Internet three decades ago, none have offered as big a market as artificial intelligence. Based on a report issued by researchers at PwC, it is estimated that AI will add $15.7 trillion to the global economy in 2030.

While a number of stocks have soared in the wake of the AI ​​revolution, no company has benefited more than the semiconductor goliath Nvidia (NASDAQ: NVDA).

Nvidia is on the cusp of Wall Street’s hottest trend

In an instant, Nvidia’s graphics processing units (GPUs) have become the undisputed top choice of companies looking to run generative AI solutions and train large language models. Nvidia’s H100 chip has been delayed due to excess demand, while its successor chip, Blackwell, is expected to be sold by 2025. Blackwell is set to make its debut in the first quarter of next year.

The beauty of the overwhelming AI-GPU demand offering is that it puts the ball squarely in Nvidia’s court when it comes to pricing power. Nvidia’s GPU hardware has consistently been priced 100% to 300% higher than competing chips — and companies are eagerly lining up to pay that higher price. Over the past six quarters, Nvidia’s adjusted gross margin has expanded by more than 10 percentage points, thanks in large part to this otherworldly pricing power.

During the second fiscal quarter of 2025 (ended July 28), Nvidia saw sales growth of 122% and reported just over $30 billion in sales. To get a sense of how quickly Nvidia has grown its sales, it generated just under $6 billion in revenue for the fourth quarter of fiscal 2023.

But while it looks every bit the textbook Wall Street growth stock, Nvidia threw investors its best smoke-and-mirrors curve with a look at its latest report.

Nvidia’s $50 billion share buyback is nothing more than a smoke and mirrors campaign

With professional and everyday investors looking for Nvidia to report sales growth in the second quarter and increase its future hardware and software offerings — the company’s CUDA software toolset played a key role in keeping enterprise customers loyal to its AI-GPUs — Nvidia announced that its board approved a $50 billion share buyback program. This is in addition to the remaining $7.5 billion in a previously announced buyback allocation.

The story continues

The purpose of buyback programs is to signal to investors that a company’s board of directors believes its stock is undervalued by Wall Street and investors.

Additionally, share buybacks have the ability to reduce a company’s number of shares outstanding, which can provide an increase in earnings per share (EPS). In other words, it can make a stock more attractive to fundamentally focused investors.

However, devoting up to $50 billion to a buyback program isn’t something you’d expect from a hypergrowth company that expects to spend a small fortune on research and development of new related products and services. by the AI ​​revolution.

One of the reasons this is a complete smoke and mirrors move is that the company is eyeing its prospect of repurchasing an additional $50 billion of its stock at a time when insiders are selling their shares in the a historical rhythm. Since mid-June, CEO Jensen Huang has disposed of about $600 million worth of his company’s stock. Net domestic sales activity exceeded $1.6 billion over the past 12 months.

To add to the above, no insider has bought a single share of their company’s stock on the open market since Chief Financial Officer Colette Kress bought 200 shares in (wait for it…) December 2020!

If that’s not glaring enough, Nvidia is trying to signal that its stock is undervalued at a time when its stock is historically expensive relative to its trailing 12-month price-to-sales (P/S) ratio (TTM). .

Throughout history, you can count on one hand the number of times we’ve seen market-leading companies approach a TTM P/S ratio of 40. The last time this happened, both Amazon and Cisco Systems they went on to lose around 90% of their value following the bursting of the dot-com bubble.

Dangling the carrot of buybacks at a time when Nvidia’s valuation is historically expensive is the ultimate smoke and mirrors campaign.

History would also like a word

Looking beyond Nvidia’s share buyback announcement, investors should also heed the warnings provided by history when it comes to future innovations, technologies and trends.

While there’s no doubt that big dollar numbers tied to large addressable markets can lead to emotional euphoria on Wall Street, history has repeatedly shown that every highly touted innovation, technology, and trend of the past 30 years has sailed , finally, his way. through an early stage bubble.

The catalyst for this bubble is investors who consistently overestimate the adoption and/or utility of the following trends. Although artificial intelligence has a promising future, the simple fact that most companies do not have a well-defined game plan to increase their sales and increase their profits is a glaring warning that investor expectations are outpacing reality.

History also tells us that every game-changing technology took time to mature. It took more than half a decade for business-to-business commerce to find its footing following the proliferation of the Internet in the mid-1990s. It will take time for companies to figure out what they have with AI and how to best use technology to meet their customers’ needs.

In short, a $50 billion share buyback program doesn’t hide the fact that Nvidia insiders are big sellers, the stock is historically expensive, and no highly regarded innovation has escaped an early-innings bubble for three decades.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Cisco Systems, and Nvidia. The Motley Fool has a disclosure policy.

Nvidia’s $50 billion share buyback is the ultimate smoke and mirrors campaign was originally published by The Motley Fool