Nvidia Will Buy Back $235 Billion of Its Stock by January 2028. Does That Make the Stock a Buy?
I'm LongbridgeAI, I can summarize articles.Nvidia authorized a $235 billion stock buyback by January 2028, driven by massive free cash flow from AI data center growth. The company also increased dividends to $0.25 per quarter, returning $26 billion last quarter. While management cites confidence in long-term opportunities and capital-light operations limiting reinvestment options, analysts question if the repurchase is smart given current valuations, noting Buffett's advice on price-dependent buybacks.
Few companies have been bigger beneficiaries of the massive artificial intelligence data center build-out than Nvidia (NVDA -1.18%). The company's graphics processing units (GPUs) are essential infrastructure for AI training and inference. That's led its data center sales to soar from $11 billion in fiscal 2022 to a $356 billion run rate as of its most recent quarter. As Nvidia is a relatively capital-light business, that's resulted in a tremendous amount of free cash flow.
Nvidia is already returning a lot of that cash to shareholders through dividends and buybacks. But the board just authorized the largest share repurchase plan in history, adding $150 billion to Nvidia's remaining authorization. Management now has $235 billion in total buyback authorizations, and it plans to deploy the full amount before the end of January 2028.
The question for investors is: Does that make the stock a buy?
Image source: The Motley Fool.
A big increase in capital returns is coming
Nvidia is growing fast, but its capital returns are growing even faster.
The chipmaker's revenue climbed 106% last quarter, and both gross and operating margins expanded year over year, resulting in net income climbing 126%. Despite ramping up its research and development spending, the company continues to see incredible operating leverage, with operating expenses expected to fall to less than 10% of revenue next quarter.
Meanwhile, management announced a massive dividend increase with its first-quarter earnings report, raising the payout from $0.01 per quarter to $0.25 per quarter. That's about $24 billion in total dividend payments annually. Overall, the company returned $26 billion to shareholders last quarter through dividends and buybacks. That's up from $10 billion a year ago.
NASDAQ: NVDA
Key Data Points
At the start of fiscal 2027, management intended to return 50% of free cash flow to shareholders. So far, it's exceeding that level, with $46 billion returned through the first half of fiscal 2027 out of nearly $70 billion in free cash flow. During the earnings call, CFO Colette Kress said the higher capital return rate will be the norm: "We intend to increase and return excess free cash flow net of strategic uses."
Free cash flow could grow significantly next year. Management is already providing a fiscal 2028 outlook of 70% revenue growth. It should be able to produce very high free cash flow conversion from that growth, based on the operating leverage it continues to demonstrate.
As such, total buybacks could grow well above 70% next year, driven by strong free cash flow growth and plans to return a higher percentage of it. Based on the remaining $235 billion authorization for just over five quarters, quarterly repurchases will need to more than double next year for it to exhaust the full amount. Considering Nvidia's finances, that seems well within reason.
Is the massive share repurchase a smart idea?
There's no doubt Nvidia is sitting on a massive amount of cash thanks to booming AI spending. Management has a very good problem on its hands. It needs to determine the best way to allocate that capital. Nvidia is a relatively capital-light business because it outsources the most capital-intensive part of the semiconductor business -- manufacturing. It doesn't have many ways to redeploy capital into the business.
It can build new ancillary businesses, acquire other businesses, make strategic minority investments, or return capital to shareholders. It's worth noting that these options aren't mutually exclusive, and management's task is to find the best use of capital for each incremental dollar. So, it can use some cash for acquisitions while returning a bunch to shareholders, too.
That's exactly what Nvidia's doing. "Our cash generation gives us the capacity to invest in the technologies that advance this transformation and return capital to shareholders," CEO Jensen Huang wrote in the press release announcing the new repurchase authorization. "This authorization reflects our confidence in the long-term opportunity ahead."
With such large amounts of free cash flow, Nvidia cannot reasonably deploy that much to grow the business. The most tax-efficient way to return capital to shareholders is through share repurchases, but that also relies on the stock trading at or below its intrinsic value. As Warren Buffett cautions, "All stock repurchases should be price-dependent. What is sensible at a discount to business-value becomes stupid if done at a premium." If not, a dividend could be a better option to return capital, letting shareholders determine the next best investment available.
If you're a shareholder in Nvidia at today's price, the new $150 billion repurchase authorization probably seems like a great way to return capital to shareholders. If you've continued to sit on the sidelines and believe Nvidia stock is overvalued, the new repurchase plans shouldn't change that opinion. In fact, it probably makes the investment look less attractive right now, but it could turn positive if the stock experiences a major price pullback.