Over the past two years, I’ve been conflicted about Nvidia (NASDAQ:NVDA) buying back its stock. At times, Nvidia stock has appeared incredibly overvalued, while at other times, like right now, it seems pretty darn cheap.
The company has said that it won’t make any more share repurchases of NVDA stock until it closes its acquisition of Mellanox Technologies (NASDAQ:MLNX), which is expected by the end of this calendar year. As a result, it might not turn on the buyback machine until sometime in fiscal 2021, most likely in the spring.
I believe that’s a mistake. Here’s why.
Nvidia’s Valuation
Although Nvidia stock, including dividends, is up 21.1% year to date through August 28, it is down 41.0% for the past 52 weeks. It currently is trading 34% from its 52-week low of $124.46 and 43% from its 52-week high of $292.76. That’s 20% below its midpoint of $208.
In my eyes, that makes NVDA stock cheaper than it’s been in some time.
That said, from a financial metrics standpoint, its current valuation might appear expensive. Nvidia’s price-to-sales ratio (9.8x vs. the five-year average of 8.3x) and price-to-cash flow ratio (32.8x vs. the 5-year average of 29.8x) are both higher than their historical average.
However, its free cash flow for the trailing 12 months is $2.45 billion, $500 million higher than its five-year average. Nvidia’s current enterprise value is $92.3 billion, which translates into a free cash flow yield of 2.7%.
Now, if you consider its free cash flow yield from last September when it hit its all-time high of $292.76, Nvidia’s FCF yield would have been 1.8% based on free cash flow of $3.14 billion and an enterprise value of $173.0 billion [610 million shares multiplied by $292.76 plus $2.0 billion debt less $7.6 billion in cash and marketable securities] .
From a free cash flow perspective, Nvidia stock appears slightly cheaper despite the slight erosion of free cash flow, which brings me to it buying back its stock.
Nvidia’s Got a History
When Nvidia released its Q3 2019 results last November, it announced that it would return an additional $3 billion to shareholders by the end of fiscal 2020.
In the fourth quarter of fiscal 2019, Nvidia repurchased $700 million of its shares, as part of the $3 billion it promised to return to shareholders. The company paid $134.51 on average per share for those shares.
The midpoint between the high ($222.0) and low ($124.46) during those three months was $173.23, considerably higher than the price it paid to repurchase its shares.
Nvidia did an excellent job buying back its shares in the fourth quarter.
And then Nvidia bought Mellanox, and the share repurchases ended.
Under its plan to return $3 billion to shareholders in fiscal 2020, it still has $2.1 billion in dividends and share repurchases to make between now and the end of January. Since it won’t do any more share repurchases until the Mellanox deal closes, it will have $1.9 billion in share repurchases to make in Q1 2021.
I sure hope it doesn’t buy them all at once. It would likely overpay if forced to buy at any price. Given its history, I assume it would wait for a better time and not force the issue.
The Bottom Line on Nvidia Stock
Since Nvidia’s board authorized the repurchase of its stock in August 2004, Nvidia’s bought back 260 million of its shares at an average price of $27.23 a share, delivering a 510% return on its investment.
At the end of the second quarter, the board authorized the repurchase of $7.24 billion in stock between now and December 2022.
Nvidia’s had success repurchasing its stock over the years; shareholders ought to hope it gets back to buying its stock as soon as possible.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
