A look inside Nvidia’s (NVDA) stock valuation and its cash-generating machine explains why the AI chip heavyweight can justify its jaw-dropping $150 billion share buyback plan, the largest ever.
Revenue has been on a tear, topping a record $96.2 billion last quarter, up 106% from a year ago, as demand for its AI chips continues to accelerate. As the AlphaSpace chart below shows, the company’s stock price has risen alongside its ascending quarterly top-line numbers.
Read more: What Nvidia’s $150 billion stock buyback means for shareholders and potential investors
That revenue has turned into a flood of free cash flow — the money left over after operating and capital expenses.
As a fabless company, Nvidia outsources chip manufacturing, so capital expenditures barely register against the billions in operating cash flow it generates each quarter.
Over the past five years, share repurchases have grown in step with free cash flow, as shown in the chart below, derived from Yahoo Finance data.
Last quarter, the company’s free cash flow fell by more than half, mostly because accounts receivable ballooned by more than $22 billion. The sales were booked, but the cash hadn’t been collected yet. Nvidia also stocked up on inventory ahead of its Vera Rubin launch.
All the while, the company’s forward price-to-earnings ratio has declined since August 2024, as noted by Yahoo Finance’s Executive Editor Brian Sozzi.
The trailing multiple tells a similar story: The trailing P/E 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 outlook for AI investment and its view that its shares are attractively valued,” said Hendi Susanto, portfolio manager of the GGTL ETF at Gabelli Funds.
“It should also reinforce the investment thesis that heavy spending on AI infrastructure is here to stay,” he added.
The company’s increased buyback is part of its pledge to return 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 business reporter for Yahoo Finance.
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