Nvidia's “banknote power”: large-scale repurchases+rapid development can go hand in hand

Zhitong Finance ·  09/18 17:30

Source: Zhitong Finance

Investors are thrilled by Nvidia's ever-expanding free cash flow, and they worry that Nvidia's massive share buyback will leave it without capital for critical research and development.

The Zhitong Finance App learned that when technology companies began to set aside more and more funds for stock repurchases and dividends, some investors thought this was a sign that the opportunities management thought were worth investing were declining and that growth was about to slow down. chip manufacturer$NVIDIA(NVDA.US)$Investors are excited by the ever-expanding free cash flow, fearing that Nvidia's massive share buyback will leave it without funding for critical research and development.

So when Nvidia announced last month that it would set aside $25 billion for share buybacks, some voiced this concern. This amount is more than five times Nvidia's profit in the previous fiscal year, yet Nvidia is under no obligation to use this money.

For others, however, that's not the point. The company is leading the way in components that underpin the infrastructure of artificial intelligence systems, which will generate significant amounts of free cash, enabling it to still invest to maintain its technological lead and return to shareholders.

According to information, Nvidia has received so much cash from the AI boom that it has enough capital to invest in new chips and return the funds to shareholders. Nvidia's free cash flow and R&D spending in the second fiscal quarter set records. After spending 3 billion US dollars on repurchases, the company still has about 1 billion US dollars left over.

Chris Mack, an analyst and fund manager at Harding Loevner, who manages $55 billion in assets, said: “It's a bit like they're trying to show the market something else: we want to show our financial strength, we're going to make some concessions. They are generating lots of cash and will continue to do so.”

Another concern is that Nvidia's stock price has tripled this year, becoming the first chip maker to reach a trillion dollars in market capitalization, so Nvidia may have been bought at an excessive price. According to reports, the company's high valuation has become a topic of debate on Wall Street. Research Affiliates founder Rob Arnott and others believe that “pricing is too perfect” for 35 times Nvidia's historical sales.

Nvidia's cash flow is expected to balance buybacks and important R&D

According to average analysts' forecasts collected by Bloomberg, Nvidia expects to generate about $38 billion in free cash flow in fiscal year 2025, compared to a budget of around $23 billion this fiscal year.

Ultimately, Nvidia has the ability to invest as much or more than potential competitors such as AMD (AMD.US) and Intel (INTC.US), which will help produce leading-edge products and maintain a steady stream of orders.

As Figure 2 shows, chipmakers are increasing their R&D budgets, with Nvidia spending more than AMD, yet Intel's budget is still the biggest.

AMD, which is competing to catch up with Nvidia in the artificial intelligence accelerator market, spent about 25% less than Nvidia in the second quarter of this year, and its free cash flow was less than 5% of Nvidia's.

Unlike the other two companies, Intel is still producing its own chips, and is spending huge sums to restore production technology to a leading position and upgrade a wider range of products to make them competitive again.

Currently, Wall Street is optimistic that Nvidia has a chance to continue to surpass the company that only recently became the world's largest chipmaker for more than 20 years.

If this prediction comes true, Nvidia will invest more money into chips and software, which has given it a dominant position in the AI accelerator market, just as Intel once had in PCs and servers.

Phil Blancato, CEO of Ladenburg Thalmann Asset Management, said: “Taking a portion of the huge free cash flow to solidify the company's balance sheet and then use that cash flow to invest in the company's future is absolutely prudent. At the end of the day, you can do both.”

It is worth mentioning that Arm Holdings Plc's stock price rose 8.5% on Friday. The day before the company had a strong performance on the first day of listing. Meanwhile, Needham & Co. gave the chip design company a “hold” rating, saying its “valuation appears to be adequate.”


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