The Nvidia Cash Cow

Something is happening in the AI chip world that can only be described as a rarity.

Nvidia is earning so much money that they have no idea what to do with it. 

Already hitting all of its investment quotas into experimental projects within research and development for further innovation within the company, Nvidia only has one logical option for what to do with its extra cash. 

They can either store their cash in low-risk investment assets or do the more financially intuitive option: buy back their own stock.

Regardless of what they decide to do, shareholders are set to be heavily rewarded with an embarrassing amount of riches in the coming years. 

Unfair Competitive Advantage

The AI chip giant has done something incredible; they have mastered both hardware and software, giving them the ultimate advantage in their field in a way that no other company could dream of competing with. 

This isn’t something that happens ever, really, even in other unrelated industries. That is like a milk company mastering both its product, the milk, and also the carton and the machines it uses to make the milk. 

The Kicker

So, obviously, Nvidia is running away with it. One might add that Nvidia should keep looking back over its shoulder to make sure others aren’t catching up. Here is the crazy part. Nvidia is already investing in such a way that it is miles ahead of its competition. It truly does not make financial sense for them to put in more money than they already have into R&D. 

For them, the best course of action is to reinvest their cash back into their own stock to secure even more profits from their business. 

How crazy is that? Who would have thought a thing like that would happen in our economy? 

Best Stock In Its Class

Currently, the common consensus for Nvidia’s price target is $160 despite ongoing selloffs beginning earlier this month. Shares have soared over 150% so far this year and have more than tripled since a year ago. This fast incline in stock for such a large and well-known company is practically unheard of. 

Even with this sharp increase, Nvidia is not planning on slowing down anytime soon. Among the Magnificent 7 stocks, Nvidia still has the most upside, even with these big increases. With such a sharp leap in valuation, major selloffs are bound to happen, but not with a stock such as Nvidia, which has such an incredible valuation that it has more than enough room to grow much, much further.  

Nvidia’s Innovation

Going back to R&D, another one of Nvidia’s major advantages is the pure speed and cadence of its new innovative products. The AI chipmaker not only has the funding necessary to spur fast and bountiful innovation, but it also has the best talent and brains in the world to make it happen. This means that Nvidia is the one that is discovering all of the new innovations and not some startup or other major competitor. This, yet again, puts them even further ahead than the rest of its competition. 

The best way to describe their progress is that they are a bullet train going 150 miles an hour while everyone else is trying to catch up in a 60 mph Prius. 

With this in mind, the company is set to generate $270 billion in cash over the next three years, which sets them up brilliantly to buy back their stock and cash in on their own growth. This will, in turn, make them even more money and allow them to balloon to new heights using their own success. 

How wonderful. 

What to do?

The situation is so unprecedented that analysts simply don’t know how to properly view or analyze the whole picture. Typically, stock buybacks are associated with older companies, which can be seen as negative as it implies that the company has stopped growing; however, Nvidia’s situation is a whole different ball game. 

To begin with, they have already invested in everything that possibly could on the R&D side; there is justn’t anything left to invest in on that end. The government and regulators themselves will likely not allow Nvidia to buy assets big enough for what $270 billion in cash could afford them to buy. So what more can they do? Either park their money in a low-risk investment or just reinvest it back into themselves through stock buybacks. 

In fact, the company has already started doing so. Last year, it announced a $25 billion stock repurchasement program, and as recently as last month, Nvidia boosted its quarterly cash dividend by 150% from $0.04 per share to $0.10, equivalent to $0.01 per share on a post-split basis.

It's not an insult to buy back stocks if you have nothing else to do. 

The Financials

Looking at Nvidia’s recent financials shows that the company's cash generation is accelerating at a new rate. The end of Q4 last year saw Nvidia’s net cash from operating activities soar to over $28.1 billion from $5.6 billion the year prior. Just in the first quarter of 2024, the company earned more than $15.3 billion from operating activities, which is already more than half of last year’s total. 

They are well on their way to breaking their record.

The Good News

Meanwhile, Jenson Huang had even more good news to tell investors this past week as he explained that Nvidia will continue to remain the gold standard for AI chips. 

Some investors were concerned that competitive rivals could cut into the company's market share; however, these concerns were dispelled with the upcoming rollout of Nvidia’s Blackwell system later this year, which the CEO claims will likely be the most successful product in company history and even in the entire computer history.

To say something like that, you must be on another level, which Nvidia certainly is. The company looks to solidify its lead in the industry even further, which they are more than capable of doing.