Buybacks Elevate Tech
Good in the short-term, bad in the long term – that’s my idea about the current indulgence in tech stock buybacks.
Tech companies have announced over $1 trillion in stock buybacks, pummeling any historical record in a bid to try and accelerate stock prices.
We are at the end stages of the bull market, and every tech company is trying to use every trick in the book to push their stock price even higher.
In May and April, Apple (AAPL) and Alphabet (GOOGL) announced $100 billion and $70 billion in share repurchases.
On Wednesday, Nvidia (NVDA) announced another $60 billion buyback.
Tech management is stumbling over itself just to buy more of its own stock.
In the short-term, tech stocks rise, but at what cost?
Innovation gets put on the back burner in order to juice the near-term stock price, and buybacks have become a significant tool for technology companies to manage their capital and boost shareholder value.
In recent years, tech giants have increasingly utilized buybacks to reduce the number of outstanding shares, which can inflate stock prices by increasing earnings per share (EPS) and signaling confidence in future growth.
Buybacks signal to investors that management believes the stock is undervalued, and I don’t believe NVIDIA should be buying back its stock at these nosebleed prices.
The tech industry’s reliance on buybacks has intensified in recent years due to several factors. Many tech companies, particularly large-cap tech, generate substantial free cash flow, providing the financial flexibility to repurchase shares.
Nvidia, a dominant force in AI chip manufacturing, exemplifies how buybacks can amplify stock performance.
This $60 billion program is tops the $50 billion authorized in August 2024 during the previous year’s Q2 earnings.
This psychological feedback loop can attract more investors, further inflating the stock price. In 2024, Nvidia’s stock rose over 150%, partly fueled by such confidence signals, though buybacks were just one factor alongside strong earnings and AI hype.
Buybacks can inflate stock prices artificially, creating a disconnect between market valuations and fundamental business performance.
If Nvidia’s AI growth slows or market sentiment shifts, the stock could face sharp corrections and maybe something similar to the April pullback.
The Nasdaq, with buybacks contributing to its 20% gain in 2024, won’t be replicating this every year from here on out.
The gripe I have with these buybacks, let’s take, for example, Nvidia, the stock is way too expensive to partake in this type of maneuvering.
At a time when AI competition is becoming fierce, blowing $60 billion overpaying for its own stock when that money should be deployed, making sure the competition doesn’t come anywhere near its competitive moat.
There have also been calls or shrieks lately that AI is overhyped.
I am still not super convinced that this will be the cash cow that many are tapping it up to be.
For such an uncertain technology, it’s a fool’s errand to spend that cash flow on stock buybacks.
Remember that Nvidia disclosed that four unnamed customers accounted for approximately 46% of its total revenue of $30 billion.
If even one pulled back, NVDA stock could pull back by half. If the AI narrative starts to falter, we could easily see the market flip on a dime.
We are getting into risky territory, and NVDA is still heart and center of the AI trade, and could easily blow up if companies start banging the drum that AI isn’t that good.
