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Does Nvidia’s Big Buybacks Raise Concerns About Future Growth?

Barchart - Fri Sep 15, 10:42AM CDT

Some analysts are concerned that Nvidia’s (NVDA) massive stock repurchases could leave it short of cash for vital research and development (R&D).  However, those concerns may be misguided as Nvidia’s free cash flow and spending on research and development both rose to records in Nvidia’s fiscal second quarter, and the company still had about $1 billion left after spending $3 billion on stock buybacks. 

There are concerns that when technology companies start boosting their amounts for share repurchases and dividends, it is a sign that management sees fewer opportunities worth investing in and that growth is poised to slow.  Last month, Nvidia said it would use $25 billion for stock repurchases, representing more than five times the profits the company generated in its last fiscal year.

However, some analysts are not concerned with the massive influx of cash that Nvidia is using for stock buybacks.  Harding Loevner, a fund manager who owns Nvidia as part of the $55 billion in assets it has under management, said, “They’re generating a ton of cash and will continue to do that, and it is kind of their attempt to show the market that they know how financially strong they are and they’re going to flex a bit.” 

With the recent surge in Nvidia’s shares to record highs, there are concerns that Nvidia could be buying its own shares at overinflated prices after its stock price tripled this year. Research Affiliates have argued that Nvidia’s nose-bleed valuation at 35 times trailing sales has the stock “priced beyond perfection.”  According to Bloomberg estimates, Nvidia is projected to generate about $38 billion in free cash flow in fiscal 2025, which ends on January 31, 2025.  That compares to about $23 billion in the current fiscal year.

Nvidia’s rivals are attempting to catch up with Nvidia in the market for artificial intelligence accelerators.  Advanced Micro Devices (AMD) spent about 25% less than Nvidia in the second quarter and had less than 5% of Nvidia’s free cash flow.  Intel (INTC) is spending heavily to restore its production technology to leadership and to upgrade more of its products to make it competitive again. 

However, Nvidia’s leadership in producing chips for AI applications will see its revenue projections continue higher, which bodes well for increased R&D spending and stock buybacks in the future.  Ladenburg Thalmann Asset Management said, “It’s absolutely prudent to take a portion of that tremendous free cash flow to firm up your company’s balance sheet and then secondarily use that cash flow to invest in the company’s future.”

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.