After the stock more than tripled this year, Nvidia’s move to buy back $25 billion worth of its shares caught some investors off-guard, even as they cheered a stellar second-quarter report. The chip maker’s projection that sales will surge to $11 billion in the three months that end in July blew past estimates by more than double and reflects an artificial intelligence boom that has lifted demand for Nvidia’s chips.
The company’s decision to repurchase its stock is the fifth-largest buyback announcement among U.S.-based companies this year and will add to its lofty valuation. The stock trades at 46 times expected earnings, a premium to the Nasdaq Composite’s 20-times multiple.
Some investors welcomed Nvidia’s repurchase plan, saying management believes the stock is undervalued and that the company can use its cash to boost growth, such as investing in research and development. Tech companies often prefer to reinvest in their shares over dividends, which can come with a lock-in on future earnings and restrict their flexibility to pursue investment opportunities.
Others questioned why Nvidia, which has the most significant market capitalization of any publicly traded company worldwide, would spend some of its proceeds on buying back stock rather than investing those funds in future growth. “If they are going to invest in the business, I’d like to see them reinvest that into the company,” said King Lip of Baker Avenue Wealth Management, who has an “aggressive” position on Nvidia.
Nvidia also announced that it will increase its research and development budget by 35% to $2.25 billion this year from $1.35 billion in 2018. That’s a sign that the company is confident its strategy will pay off, despite concerns about slowing global economic growth and worries that the artificial intelligence boom will cool over time.
As a result of Nvidia’s strong showing in the second quarter and its new share-buyback program, many analysts raised their price targets on the chipmaker. The Philadelphia Semiconductor Index rose 3%, and chipmakers worldwide also added to gains. But other tech and growth stocks tumbled as investors took profit, with Advanced Micro Devices and SK Hynix down more than 6%.
Investors had piled into the chipmaker recently, buoyed by the prospect that the artificial intelligence boom will continue to drive significant demand for Nvidia’s chips. Those hopes were reinforced by the company’s second-quarter results, which on Thursday sent the stock higher. In addition to the strong revenue forecast, Nvidia reported a profit that beat expectations and said it had hired more staff than expected to meet demand. That helped push the stock to a record high. The chipmaker’s share-buyback program is set to run through the third quarter of 2020, and the company plans to buy back up to $2.5 billion more this year. (Reporting by Jeff Mason; Editing by Pauline Wong)
