Elevator Pitch
I continue to rate Nvidia Corporation (NASDAQ:NVDA) stock as a Buy.
With my earlier June 13, 2023 write-up, I highlighted that NVDA’s shares can rise to $500 and above, considering its long growth runway leveraging on artificial intelligence (“AI”) opportunities. On August 24, 2023, Nvidia’s shares opened at $502.16 and traded as high as $502.66 (new 52-week high) on the same trading day. The company reported above-expectations Q2 FY 2024 (YE January 31) results on the prior day, August 23.
In this latest article, I touch on Nvidia’s new share repurchase program, and the demand-supply dynamics relating to the company’s Data Center business segment. My view of NVDA’s latest share buyback plan is favorable, and the outlook for Nvidia’s Data Center segment is positive considering robust demand and an increase in supply. This explains why I am leaving my Buy rating for Nvidia unchanged.
New Share Buyback Plan
In the company’s Q2 FY 2024 earnings press release, NVDA disclosed that “the Board of Directors approved an additional $25.00 billion in share repurchases, without expiration.” There is still $3.95 billion of Nvidia’s existing share buyback program that expires in December 2023 which is unutilized.
I have a positive opinion of Nvidia’s new share repurchase plan, taking into consideration three key factors.
Firstly, NVDA is expected to generate robust cash flow in the foreseeable future, and this has allowed the company to allocate excess capital to shareholder capital return initiatives such as buybacks.
Operating cash flow from Nvidia increased by +400% YoY and +118% QoQ to $6,348 million in the second quarter of fiscal 2024, while NVDA’s free cash flow expanded by +624% YoY and +128% QoQ to $6,059 million (source: S&P Capital IQ). Looking ahead, the Wall Street analysts see Nvidia’s free cash flow surging by +522% in full-year FY 2024 and increasing by a reasonably strong +25% CAGR for the FY 2025-2028 time period as per S&P Capital IQ consensus data.
In other words, Nvidia’s new share buyback authorization amounting to $25 billion sends a clear message that the company has confidence in its future cash flow generation.
Secondly, it is worthy of note that NVDA’s new $25 billion share repurchase program doesn’t expire, which is in contrast with the company’s existing share buyback plan which expires by the end of this year.
In my view, a share buyback program without an expiration date gives Nvidia greater flexibility to repurchase the company’s shares in an opportunistic manner.
As it relates to a share repurchase plan with a specific expiration date, a company is “compelled” to buy back its shares without regards for price within a specific timeframe, assuming that it intends to complete the buyback program. In contrast, it is typically opportunistic share repurchases that capitalize on market dislocations which create the most value for shareholders.
NVDA has a track record of buying back its own shares at the most appropriate time. A June 13, 2023 Bloomberg news article noted that NVDA “spent more than $10 billion repurchasing shares” in FY 2023 following “a precipitous drop in the (stock) price” and “a three-year hiatus.” In this Bloomberg piece, it was highlighted that Nvidia’s shares eventually rose to “more than double the average stock price” for the prior fiscal year.
It is reasonable to assume that Nvidia will be smart enough to repurchase the company’s shares in an aggressive manner when such opportunities present themselves.
Thirdly, the new share buyback authorization is of an appropriate size.
Reuters recently published an article on August 25, 2023 mentioning that Nvidia’s technology peers such as Meta Platforms (META), Alphabet (GOOG, GOOGL), and Apple (AAPL) have come up with relatively larger share repurchase programs in the new fiscal year. On the flip side, NVDA’s new $25 billion share repurchase plan is still pretty significant on an absolute basis, as it is equivalent to roughly one year of Nvidia’s expected net profit or free cash flow. As per S&P Capital IQ data, Nvidia’s consensus FY 2024 normalized net income and free cash flow estimates are $26.8 billion and $23.7 billion, respectively.
NVDA is still prioritizing capital investment over capital return. The size of the company’s new share repurchase plan is still pretty meaningful, but its new share buyback program isn’t that large to suggest that there is a lack of opportunities to invest in new growth initiatives.
In summary, I view NVDA’s new buyback program in a favorable light.
Favorable Demand-Supply Dynamics
Nvidia guided for a Q3 FY 2024 top line of $16 billion (+25% above expectations) when it released its second quarter financial results last week. This implies that NVDA is of the view that its revenue could potentially grow by +19% QoQ and +170% YoY in the current quarter.
The Data Center business is the star for NVDA. In Q2 FY 2023, Nvidia saw revenue for its Data Center segment increase by +171% YoY and +141% QoQ to $10.3 billion, and this was way higher than the market’s consensus second quarter data center sales forecast of around $8 billion (source: S&P Capital IQ). At the company’s Q2 FY 2024 earnings call on August 23, Nvidia attributed the Data Center’s excellent performance to “accelerating demand from cloud service providers and large consumer Internet companies for HGX platform, the engine of generative AI and large language models.”
Looking ahead, the growth prospects for Nvidia’s Data Center segment are pretty good, thanks to favorable demand-supply dynamics.
On the demand side of things, corporates are placing a strong emphasis on AI investments and they are reallocating their budgets accordingly in favor of NVDA’s Data Center business. While companies’ overall IT budgets are pressured by the challenging macroeconomic environment, they realize that investing in AI has the potential to achieve substantial gains in business performance. Nvidia cited a case study of Meta Platforms witnessing a “24% increase in time spent on Instagram” with “AI recommendations” supported by “investments in data center infrastructure purpose-built for AI” at its Q2 results call.
Also, supply isn’t expected to be less of a constraint for NVDA’s Data Center business going forward. At its most recent quarterly earnings call, Nvidia highlighted that “our supply over the next several quarters will continue to ramp as we lower cycle times and work with our supply partners to add capacity.” Notably, Financial Times recently reported on August 23, 2023 that “TSMC (TSM) plans to double its capacity for CoWoS, an advanced packaging technology needed to make Nvidia’s H100 processor.” In this Financial Times report, there are sources highlighting the possibility of TSM’s shipments of the H100 processor increasing from half a million units this year to as much as two million units next year.
Closing Thoughts
My rating for Nvidia stays as a Buy. I think that the growth outlook for Nvidia’s Data Center business is good, taking into account favorable demand-supply dynamics. I also think that NVDA’s new share repurchase plan is a good move from the perspective of enhancing shareholder value with capital allocation.
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