Nvidia's (NASDAQ: NVDA) fiscal second-quarter earnings report is out, and it appears the chipmaker is raking in massive sums of cash. Revenue for the period was $30 billion, up 122% year over year. Even more, earnings per share soared 168% to $0.67. Further, free cash flow for the quarter was about $13.5 billion, up from approximately $6.0 billion in the year-ago period.
"NVIDIA achieved record revenues as global data centers are in full throttle to modernize the entire computing stack with accelerated computing and generative AI," said Nvidia founder and CEO Jensen Huang in the company's quarterly report.
All of this is great. But in the context of Nvidia's nearly $3 trillion market capitalization, it's not as impressive. Herein lies the problem with Nvidia stock: The valuation may simply be a bit ahead of itself. One telling way to further highlight this is by taking a look at the company's share repurchase program and viewing it next to its massive market cap.
Everything is relative
Nvidia repurchased $15.4 billion worth of its shares over the last two quarters. This would leave $7.5 billion of authorized cash for further repurchases, except the company just announced that its board of directors authorized an additional $50 billion for repurchases.
Sure, $50 billion is a huge sum. But it's a bit small in the context of Nvidia's approximately $3 trillion market cap. Even when you add in the $7.5 billion it still has from its previous program, total outstanding cash authorized for repurchases amounts to less than 2% of Nvidia's market cap.
Compare this to the $60 billion authorization Apple (NASDAQ: AAPL) announced when it got serious about share repurchases in 2013. This amounted to nearly 16% of the company's shares outstanding at the time. Fast forward to Apple's first full quarter following this authorization and the company spent $11 billion buying back its stock. And what was Apple's market cap at the time? Around $400 billion. In contrast, Nvidia spent just about $7.2 billion in its most recent quarter repurchasing shares even though the company's market capitalization amounts to about $3 trillion today.
In one final comparison with Apple, Nvidia's cash, cash equivalents, and marketable securities currently total $34.8 billion, or just over 1% of the company's market capitalization; yet Apple's cash at the time it got serious about repurchases was $147 billion, or more than a third of its market capitalization.
In short, Nvidia's underwhelming repurchase program (and cash balance to support it) relative to its market capitalization arguably draws attention to the fact that its valuation may be a bit inflated.
Questionable timing
The other issue with Nvidia's repurchase program is the timing. With shares trading at around 55 times earnings, the stock may have already priced in the continued upside for this cyclical business. Repurchasing shares at a potentially fair or overvalued price isn't always in the best interest of shareholders. It may be better for Nvidia to hold onto cash and buy back its stock if it were available for a better price -- a price that looks like a clear discount to a conservative estimate of the stock's intrinsic value.
Of course, Nvidia's business performance is worth applauding. It's incredible how the company has innovated and executed to capitalize on the demand for AI-fueled products and services. Further, the company's growth rate and profitability is astounding. Still, none of this addresses the key concern investors should have: Valuation.
Sure, it's possible that the company easily grows into its valuation. But the cyclical nature of semiconductor businesses and the industry's long history of intense competition warrant some caution at the stock's current price.
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Here's Why Nvidia's New $50 Billion Buyback May Bolster the Bear Case for the Stock was originally published by The Motley Fool