Balancing Priorities: Nvidia's Cash Reserves Enable Buybacks and Critical R&D Investments
Some investors were concerned that $NVIDIA (NVDA.US)$'s large share buyback last month would leave the company with insufficient funds for crucial research and development. However, according to the average of analyst estimates compiled by Bloomberg, $NVIDIA (NVDA.US)$ is projected to generate roughly $38 billion in free cash flow during fiscal year 2025, more than 4.5 times the amount from fiscal year 2022. This suggests that the company may be able to balance its share buybacks with important R&D efforts.
After announcing the significant earnings beat, $NVIDIA (NVDA.US)$unveiled a $25 billion share buyback program in August. While investors generally view buybacks as an encouraging sign because companies are returning capital to shareholders and management believes that their stocks are undervalued, this move by $NVIDIA (NVDA.US)$ is somewhat of a head-scratcher, as it comes at a time when its stock is up 200% and has reached new record highs. Investors are concerned about companies repurchasing shares at the wrong time, in other words, when stock prices are too high.
Additionally, the decision by high-growth tech company $NVIDIA (NVDA.US)$ to allocate more than five times its prior year's profit toward share buybacks is viewed by certain investors as an indication that management perceives few worthwhile investment opportunities and anticipates a slowdown in growth. Speculation is growing that $NVIDIA (NVDA.US)$ may face resource deployment limitations due to regulatory hurdles, following the collapse of its acquisition of semiconductor designer Arm last year.
"As a shareholder, we like to see stock buybacks, but for a company like Nvidia that is growing so fast, you kind of want to see their earnings being plowed back in to the company,” said King Lip, chief strategist at Baker Avenue Wealth Management.
"They're generating incredible amounts of cash, more than they need for their current investment strategy, and they're prohibited from buying significant complementary businesses; so what are they going to do with their cash?" said Tom Plumb, CEO and lead portfolio manager at Plumb Funds.
Interestingly, $NVIDIA (NVDA.US)$ repurchased more than $10 billion worth of shares during the fiscal year that ended on January 29, a period when the company's stock price was relatively low. Notably, this buyback followed a three-year break, seemingly suggesting that $NVIDIA (NVDA.US)$maintains a disciplined approach to share repurchases.
$NVIDIA (NVDA.US)$ is not the only tech heavyweight engaging in substantial share repurchases this year. For instance:
1. $Meta Platforms (META.US)$ kicked off the trend by unveiling a $40 billion share repurchase program following better-than-anticipated Q2 2022 results in February.
2. $Alphabet-A (GOOGL.US)$ also joined the movement by announcing an extra $70 billion dedicated to stock buybacks in April.
3. $Apple (AAPL.US)$authorized an additional $90 billion for its common stock repurchase program after posting strong second-quarter FY2023 results in May.
Some analysts explain that tech companies often choose to buy back stock with cash on hand instead of paying dividends, as it provides more flexibility and control over their cash positions.
"if they are on the hook for a dividend every quarter that may hinder their ability to take advantage of growth opportunities," said Daniel Klausner, head of U.S. public equity advisory at Houlihan Lokey.
According to some analysts, $NVIDIA (NVDA.US)$'s robust cash flow from the AI boom is ample for both maintaining its technological leadership and rewarding shareholders. The average analyst forecast compiled by Bloomberg predicts that $NVIDIA (NVDA.US)$ will generate approximately $38 billion in free cash flow during fiscal year 2025.
Analysts have expressed confidence in $NVIDIA (NVDA.US)$'s ability to maintain its competitive edge through strategic investments in research and development, partnerships, and other critical areas. Despite $Intel (INTC.US)$'s current budgetary advantage, Bloomberg data reveals that $NVIDIA (NVDA.US)$'s spending outstrips that of $Advanced Micro Devices (AMD.US)$. Furthermore, some analysts predict an even brighter future for $NVIDIA (NVDA.US)$, with the company on track to surpass $Intel (INTC.US)$ in sales. Should this come to pass, NVIDIA would be equipped with even greater financial resources to channel into the silicon and software technologies that underpin its leading position in the AI accelerator market, cementing its status as a long-term player in the space.
“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 using that cash flow to invest in the company’s future; At the end of the day, you can do both,” said Phil Blancato, chief executive officer of Ladenburg Thalmann Asset Management.
Source: Bloomberg, Investopedia, Reuters, moomoo
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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