A look at Nvidia’s (NVDA) stock valuation and cash-generating machine explains why the AI chip heavyweight can justify its jaw-dropping $150 billion stock buyback plan, the largest ever.
Revenue is up sharply, surpassing a record $96.2 billion last quarter, up 106% from last year, as demand for its AI chips continues to accelerate. Like the AlphaSpace Chart As shown below, the company’s stock price has risen alongside its ascending quarterly numbers.
Learn more: What Nvidia’s $150 Billion Stock Buyback Means for Shareholders and Potential Investors
That revenue turned into a flood of free cash flow – the money left over after operating and capital expenditures.
As a fabless company, Nvidia outsources chip manufacturing, so capital spending barely pales in comparison to the billions in operating cash flow it generates each quarter.
Over the past five years, share repurchases have increased in step with free cash flow, as shown in the chart below, derived from data from Yahoo Finance.
Last quarter, the company’s free cash flow fell by more than half, mainly because accounts receivable increased by more than $22 billion. The sales have been recorded, but the money has not yet been collected. Nvidia also stocked up on inventory ahead of the Vera Rubin launch.
Meanwhile, the company’s forward price-to-earnings ratio has declined since August 2024, as noted by Brian Sozzi, editor-in-chief of Yahoo Finance.
The trailing multiple tells a similar story: the price-to-earnings ratio has compressed as earnings growth has outpaced the stock’s gains, as shown in the AlphaSpace chart below.
Nvidia’s share buyback plan “underscores the company’s confidence in the growth prospects of AI investments and its view that its shares are attractively valued,” said Hendi Susanto, portfolio manager of the GGTL ETF at Gabelli Funds.
“This should also reinforce the investment thesis that significant spending on AI infrastructure is here to stay,” he added.
The company’s increased buybacks are part of its commitment to returning money to investors. Earlier this year, CEO Jensen Huang said Nvidia would return “50% or more of free cash flow to our shareholders this year, next year and beyond.”
Ines Ferre is a senior economics reporter for Yahoo Finance.
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