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NVIDIA Corporation (NVDA) earned itself a position as the top performer in the S&P500 this year, after shocking investors with its blowout second-quarter earnings last week. The company exceeded all expectations and forecasted even more growth in the next quarter. The company guided towards revenue of $16 billion in Q3 2023, representing 170% year-over-year growth.
For the better part of two decades NVIDIA has held the lead in graphics processing units (GPUs) and I recollect that in the early 2000s, the graphics card market was a duopoly between ATI Technologies and NVIDIA. I held a position in ATI Technologies before it was acquired by AMD in 2006.
In recent years NVIDIA has expanded that lead, especially as its processors found new applications in bitcoin mining and more importantly in machine learning. While AMD is a close second when it comes to GPUs related to gaming, NVIDIA has taken a significant lead in processors built for data centers (DPUs) and AI.
Tom’s Hardaware said it best when comparing GPUs by NVIDIA, AMD, and Intel to run AI:
As expected, Nvidia’s GPUs deliver superior performance — sometimes by massive margins — compared to anything from AMD or Intel.
Unlike certain other high-growth companies, NVIDIA’s sales have translated into increasing net income, free cash flows, and margins.
Headquartered in Santa Clara, NVIDIA was founded by CEO Jensen Huang, Chris Malachowsky, and Curtis Priem on April 5, 1993.
NVIDIA operates as a fabless software company, specializing in the design of graphics processing units (GPUs), application programming interfaces (APIs) catering to data science and high-performance computing, and system-on-a-chip units (SoCs) intended for the mobile computing and automotive sectors.
NVIDIA envisions driving the AI era and the metaverse, where immersive virtual collaboration, simulation, and creativity seamlessly converge. As a leader in GPU production, the company plays a pivotal role in rapidly training and employing extensive language and image AI models, developing metaverse and virtual reality technologies, cryptocurrency mining, and enhancing gaming consoles.
NVIDIA navigated a downturn caused by a combination of Ethereum’s shift to proof-of-stake and the pandemic-induced drop in PC sales. These factors led to substantial excess inventory that NVIDIA had to write off during the latter part of last year. However, amidst these challenges, the consistent expansion of data center revenue stood out as a positive outcome, driven by the rising demand for machine learning workloads.
The Cisco Comparison and Risks:
Given the rapid surge in NVIDIA’s revenue, several market participants are comparing NVIDIA today to Cisco at the peak of the dot com bubble after a nearly 4,000% run-up in Cisco’s stock between 1995 and 2000. WisdomTree’s CIO Jeremy Schwartz discussed it in this article and Twitter thread and so did Michael Batnick here.
Considering we are still in the early stages of this new AI cycle and the fact that NVIDIA is trading at less than 30 times fiscal 2025 earnings estimates, I think the Cisco comparison is premature.
While I think NVIDIA has significant runway ahead, there are risks to be aware of including competitors like AMD and Intel capturing market share, potential manufacturing disruption at NVIDIA’s partner Taiwan Semiconductor and fading enthusiasm for AI if it does not deliver the kind of productivity gains everyone is betting on.
Expanding Gross Margins:
NVIDIA’s commanding presence in the data center and gaming GPU sectors gives it substantial pricing leverage. The growth of its more profitable software offerings, coupled with its data center chip packages, is driving an enhancement in its gross margin. As evidenced by its second-quarter results, NVIDIA’s adjusted gross margin surged to 71.2%, a significant jump from 66.8% in the first quarter and 45.9% a year ago. The company anticipates this metric to further increase to a range of 72% to 73% in the upcoming third quarter.
Surging Free Cash Flow:
NVIDIA experienced an impressive surge in its free cash flow, growing by a remarkable 624% compared to the previous year and 128% sequentially, reaching a total of $6.059 billion. Moving forward, industry analysts anticipate a substantial 522% increase in the company’s free cash flow for the entire fiscal year 2024. Moreover, they project a notably robust compound annual growth rate (CAGR) of 25% for the period spanning fiscal years 2025 to 2028. Given this substantial financial strength, it makes sense for the management to announce a huge buyback program to utilize the considerable cash reserves.
Capital Allocation:
NVIDIA has gained a reputation for its skillful execution of share buybacks, often aligning them with opportune moments. During FY 2023, the company displayed this strategic approach by allocating over $10 billion towards repurchasing shares, a decision prompted by a sudden decline in the stock’s value. In this Bloomberg article, it is highlighted that NVIDIA’s shares eventually rose to more than double the average stock price for the prior fiscal year.
Since the inception of its share repurchase program through July 30, 2023, NVIDIA has repurchased an aggregate of 1.11 billion shares for a total cost of $20.40 billion.
During the second quarter of fiscal 2024, NVIDIA returned $3.38 billion to shareholders in the form of 7.5 million shares repurchased for $3.28 billion, and cash dividends. As of the end of the second quarter, the company had $3.95 billion remaining under its share repurchase authorization. On August 21, 2023, the Board of Directors approved an additional $25 billion in share repurchases, without expiration. NVIDIA plans to continue share repurchases this fiscal year. A share buyback program without an expiration date gives the company the flexibility of repurchasing its shares in an opportunistic manner at its discretion.
Despite the size of the buyback, it is a mere drop in the bucket given the company’s market cap and management states that their share repurchase programs aim to offset dilution from shares issued to employees.
Q2 FY2024 Results:
NVIDIA had a great quarter and the company’s latest earnings highlight the company’s excellent performance.
Q3 FY2024 Outlook:
NVIDIA is looking forward to a promising quarter ahead and has a positive outlook.
Bottom Line:
The generative AI market is most likely to grow at a rapid pace as more and more companies incorporate AI to automate and accelerate their businesses.
NVIDIA is trading very close to its all-time intraday high of $502.66, having outperformed the market with its stock up by a whopping 241% this year. Growth investors who don’t mind paying up for quality should revisit NVIDIA if they don’t already have a position.
Thirty-one analysts revised their earnings estimates upwards for the company over the last 90 days.
Welcome to edition 74 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.
The pace of buyback announcement activity remained consistent, as only ten companies disclosed their buyback plans last week, mirroring the identical count from the previous week.
1. Pathward Financial, Inc. (CASH): $49.20
On August 25, 2023, the Board of Directors of this bank authorized a new 7 million share repurchase program, on or before September 30, 2028, equal to around 26.7% of its market cap at announcement.
| Market Cap: $1.29B | Avg. Daily Volume (30 days): 146,372 | Revenue (TTM): $621.03M |
| Net Income Margin (TTM): 24.34% | ROE (TTM): 21.89% | Net Cash: $221.45M |
| P/E: 9.16 | Forward P/E: 8.4 | Price/Book (TTM): 1.93 |
2. Lendway, Inc. (LDWY): $5.93
On August 28, 2023, the Board of Directors of this in-store media company approved a new 400K share repurchase program, equal to around 22.2% of its market cap at announcement.
| Market Cap: $10.66M | Avg. Daily Volume (30 days): 307,075 | Revenue (TTM): $28.44M |
| Net Income Margin (TTM): 44.59% | ROE (TTM): 146.37% | Net Cash: $11.28M |
| P/E: 0.81 | Forward P/E: N/A | EV/EBITDA (TTM): -10.33 |
3. Xinyuan Real Estate Co., Ltd.(XIN): $3.09
On August 28, 2023, the Board of Directors of this home builder authorized a share repurchase program to repurchase up to 1 million shares, equal to around 18.5% of its market cap at announcement.
| Market Cap: $16.69M | Avg. Daily Volume (30 days): 11,549 | Revenue (TTM): $950.01M |
| Net Income Margin (TTM): -27.72% | ROE (TTM): -104.3% | Net Debt: $1.85B |
| P/E: N/A | Forward P/E: N/A | EV/EBITDA (TTM): -49.99 |
4. LQR House Inc. (LQR): $1.02
On August 25, 2023, the Board of Directors of this alcoholic beverage company authorized a new $2 million share repurchase program, equal to around 17.6% of its market cap at announcement.
| Market Cap: $11.53M | Avg. Daily Volume (30 days): 4,551,679 | Revenue (TTM): $723.44K |
| Net Income Margin (TTM): -202.24% | ROE (TTM): -55.41% | Net Cash: $23.58K |
| P/E: N/A | Forward P/E: N/A | EV/EBITDA (TTM): -7.23 |
5. FinVolution Group (FINV): $5.22
On August 28, 2023, the Board of Directors of this management consulting company authorized a new $150 million share repurchase program, equal to around 10.4% of its market cap at announcement.
| Market Cap: $1.46B | Avg. Daily Volume (30 days): 972,386 | Revenue (TTM): $1.69B |
| Net Income Margin (TTM): 19.53% | ROE (TTM): 19.91% | Net Cash: $1.10B |
| P/E: 4.44 | Forward P/E: 4.10 | EV/EBITDA (TTM): 0.41 |
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