Nvidia Corporation (NASDAQ:NVDA) announced second-quarter earnings on Aug. 10 after the close of trading. By almost any standard, they were a tremendous success. Unfortunately, they might not have been good enough for investors, as NVDA stock dropped on the news.
It’s possible that investors were taking profits given the North Korea conflict — NVDA stock was up 45% from Jan. 1 through its Aug. 11 opening. The fact that Nvidia shares are rallying Monday in the wake of Canaccord Genuity’s call to buy the pullback.
But maybe they’re following one of the golden rules of investing:
“Buy on rumor, sell on news.”’
Should You Continue to Own NVDA Stock?
In June, I recommended that investors hold on to Nvidia.
“Over the past four quarters, a 1% positive surprise in earnings led to a 0.5% increase in Nvidia’s share price,” I wrote. “Unless you see a stinker of a quarter coming in August — analysts expect 69 cents per share vs. 40 cents a year earlier — you might want to hold through its second-quarter report.”
Well, Nvidia delivered Q2 earnings per share of 92 cents, which were 23 cents better than the consensus estimate. Based on recent earnings surprises, NVDA stock should have jumped — and the fact that it didn’t, even amid Monday’s one-day move thanks to an analyst nod, suggests to me that it’s ready for a bit of rest. Until the North Korea situation is peaceably descalated, there won’t be an appetite for risk.
In June, I also predicted that Nvidia stock would hit $200 by the end of 2017 barring some economic catastrophe. A nuclear war on the Korean peninsula certainly qualifies.
Nvidia’s growth is too good for its stock price not to get to $200; it just might take a little longer.
“The recent volatility in NVDA stock is likely to remain. After all, the valuation is far from cheap, with the forward price-earnings ratio at 47X,” InvestorPlace’s Tom Taulli wrote after Nvidia released Q2 earnings. “Yet for those with a longer term bent — and who can stomach the wrenching moves — the periodic drop-offs represent nice entry points to get exposure to the AI opportunity.”
Taulli’s right on the money on this one. Opportunity often is disguised as a risk.
In life, there is no such thing as perfection. There’s very good, even excellent, as is the case with Nvidia’s latest earnings report, but there are always weaknesses within an otherwise remarkable set of numbers.
Here are is the one number I believe investors need to consider more closely.
Share Repurchases
In the first six months of fiscal 2018, Nvidia repurchased $758 million of its stock, $19 million more than all of the last year. The company intends to return $1.25 billion to investors in fiscal 2018, with approximately $330 million in dividends and $920 million in share repurchases, which means it will make another $162 million in buybacks over the final six months of the year.
Nvidia made no share repurchases in the first quarter and $758 million in the second. With a high of $169.93 and a low of $102.56 during the quarter, it’s possible that the company paid top dollar for those shares. We’ll know exactly how much when the 10-Q comes out in two weeks.
There is good news about its share repurchases.
In fiscal 2017, Nvidia paid $49.27 per share to repurchase 15 million shares of its stock. NVDA stock hit a high of $119.93 during fiscal 2017 and a low of $24.75 for a midpoint of $72.34. That’s a 234.4% return on its investment through Aug. 10, a remarkably good job of buying back its stock.
I doubt it will have been nearly as effective in the second quarter, but that’s yet to be determined.
Bottom Line on NVDA Stock
Nvidia issued 44 million shares in fiscal 2017 and another 4 million shares in Q1 2018 related to the conversion of its 1% convertible notes making it necessary to reduce the dilutive effect of the share issuance by repurchasing its shares. I get that.
But in my opinion, the company should have stopped buying its stock when the price hit triple digits.
As Taulli said earlier, NVDA stock is not cheap. Management has no business buying back stock at these valuations.
Call it nitpicking, but this is one red flag I can’t ignore.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
