$25 billion buyback! Why now? Nvidia shareholders are also confused.

After the stock price more than doubled during the year, NVIDIA's announcement of a $25 billion buyback plan after its earnings report surprised the market.

Despite its impressive performance, many veteran investors believe that NVIDIA's stock price has been severely overvalued. The company's large-scale buyback can be seen as a direct rebuttal to this claim, but it has also left many investors confused.

According to data from EPFR, NVIDIA's buyback plan is the fifth largest announcement among US companies this year. Stock buybacks are often seen as a way to create shareholder returns. Buybacks can reduce stock supply, increase demand, boost stock prices, and improve the key indicator that investors closely monitor - earnings per share.

When a company's stock appears to be cheap, shareholders often see buybacks as an encouraging signal. However, NVIDIA's stock price has soared by about 220% in 2023. As a rapidly growing high-tech company, many investors hope that NVIDIA will use its profits for business growth rather than boosting stock prices.

Daniel Morgan, Senior Portfolio Manager at Synovus Trust, told Reuters:

"NVIDIA's buyback is surprising for a hot growth-oriented tech company. The message seems to be that management believes their stock is undervalued."

However, if even NVIDIA is undervalued, it would be hard to find an overvalued stock in any capital market in the world.

Data from Refinitiv Datastream shows that as of Wednesday, NVIDIA's stock price is 45 times the forward earnings expectations for the next 12 months, while the S&P 500 index is at 19 times.

Tom Plumb, CEO and Chief Investment Officer of PlumbFunds, told Reuters:

"Historically, you would be happy when a company can buy back its stock when the stock price is low, but I don't think anyone can prove that it is currently low."

Plumb pointed out that the reason for NVIDIA's stock buyback may be simple: "They have too much money and nowhere else to spend it."

In 2022, NVIDIA's plan to acquire ARM fell through due to regulatory obstacles, leaving a large amount of cash lying idle in its accounts, exceeding the needs of current strategic investments. According to NVIDIA's earnings report, in 2022, NVIDIA's R&D expenses accounted for 27% of its revenue, on par with its main competitors.

Although the amount is staggering, as of Wednesday, NVIDIA's buyback only accounts for 2.1% of its nearly $1.2 trillion market value, a metric commonly referred to as the buyback yield. Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, said that based on data from the past year, this figure is lower than the historical buyback yield of 2.58% for the broader market.

Meanwhile, several other giant tech and growth companies have also announced larger-scale buybacks this year: Apple with a $90 billion buyback, Alphabet, the parent company of Google, with a $70 billion buyback, and Meta with a $40 billion buyback. Houlihan Lokey's Director of Public Equity Advisory, Daniel Klausner, pointed out:

"Tech companies tend to prefer cash buybacks over dividends because distributing dividends every quarter may hinder their ability to capitalize on growth opportunities."