NVIDIA Corporation (NASDAQ:NVDA) has been a dominant force in the technology sector, driven by its leadership in graphic processing units (GPUs) and artificial intelligence (AI). As the tech giant continues to evolve, it has made headlines again with the announcement of a massive $50 billion stock buyback plan. This buyback is a continuation of NVIDIA’s efforts to return value to shareholders and signifies confidence in its future growth. But is this buyback a sign for investors to buy NVIDIA stock now?

Understanding NVIDIA’s Stock Buyback Plan

In August 2023, NVIDIA announced a $25 billion share repurchase authorization, of which it bought back approximately $15.4 billion worth of shares by the first half of fiscal 2025. Fast forward to now, and the company has upped the ante by approving an additional $50 billion in stock buybacks. This decision comes on the heels of increasing volatility in the tech sector and shows NVIDIA’s commitment to driving shareholder value through reducing outstanding shares.

While stock buybacks aren’t new for NVIDIA, this recent authorization ranks as one of the largest buyback plans on the S&P 500, trailing only behind Apple Inc. (NASDAQ:AAPL) and Alphabet Inc. (NASDAQ:GOOGL). For income-focused investors, this is seen as a positive sign, indicating that NVIDIA is confident in its long-term prospects and financial health.

Why Stock Buybacks Matter for Investors

Share buybacks are a popular method companies use to return capital to shareholders. By repurchasing shares, companies reduce the number of outstanding shares, effectively increasing the value of the remaining shares. This can lead to higher earnings per share (EPS) and, ultimately, a rise in stock price over time.

For NVIDIA, this buyback plan demonstrates the company’s belief in its own future, signaling that management feels the stock is undervalued or poised for further gains. While the $50 billion buyback may account for less than 2% of the company’s market capitalization, the reduction in outstanding shares could still provide upward pressure on the stock price in the long run.

Will NVIDIA’s Stock Price Benefit?

Historically, stock buybacks can lead to an increase in share prices, particularly for companies that have strong fundamentals, like NVIDIA. While the broader tech sector has seen volatility due to macroeconomic concerns, NVIDIA’s fundamentals remain strong. In fact, the company has traded above its 200-day moving average, indicating a longer-term uptrend.

As the leader in GPUs and AI technology, NVIDIA’s future growth potential is significant. The global GPU market, for instance, is projected to grow from $75.77 billion in 2024 to $1,414.39 billion by 2034, at a compound annual growth rate (CAGR) of 13.8%. Additionally, the AI industry is expected to expand to $1.33 trillion by 2030. These favorable trends, combined with NVIDIA’s dominant position in both markets, support the case for continued stock price appreciation, especially when the effects of the buyback are factored in.

Risks and Valuation Concerns for NVIDIA Stock

Despite the positive aspects of the stock buyback, investors should be aware of the potential risks. One major concern is NVIDIA’s current valuation. The company trades at a forward price-to-earnings (P/E) ratio of 43.2X, significantly higher than its competitors, such as Advanced Micro Devices (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC), which trade at lower multiples. This high valuation makes the stock expensive, and investors should consider whether they are willing to pay a premium for NVIDIA’s growth potential.

Additionally, while the AI and GPU markets are poised for growth, there are always risks associated with macroeconomic conditions, competitive pressures, and changes in technology trends. Investors may want to wait for a potential dip in the stock price to find a more favorable entry point.

Should You Buy NVIDIA Stock Now?

For investors already holding NVIDIA shares, the company’s buyback plan is a positive sign that management is committed to returning capital and growing shareholder value. The stock buyback could also cushion against short-term volatility and enhance long-term returns.

However, for new investors considering entering the stock, it may be wise to wait for a dip in NVIDIA’s share price. Given the stock’s high valuation, buying at a lower price point could offer a better risk-reward scenario. That said, for long-term investors who believe in the future of AI and NVIDIA’s position as a market leader, now may still be a good time to start building a position, especially as the company continues to grow in key sectors like AI and gaming.

Featured Image: Megapixl

Please See Disclaimer