Artificial intelligence (AI) has been the hottest topic on Wall Street since sliced bread, with broad-reaching utility across almost every sector and industry. According to a report by PwC researchers, AI is forecast to add $15.7 trillion to the global economy in 2030.
Nvidia (NVDA), a semiconductor giant, has benefited significantly from this trend. Its AI-graphics processing units (GPUs) have become the top choice for businesses running generative AI solutions and training large language models. Nvidia’s H100 chip is backlogged due to excess demand, while its successor chip, Blackwell, is expected to be sold out until 2025.
The beauty of AI-GPU demand overwhelming supply lies in Nvidia’s pricing power. Its GPU hardware has consistently been priced at a 100% to 300% premium to competing chips, with businesses eager to pay this higher price. Over the last six quarters, Nvidia’s adjusted gross margin has expanded by more than 10 percentage points.
During the fiscal second quarter of 2025 (ended July 28), Nvidia delivered sales growth of 122% and reported just over $30 billion in sales. However, its latest report threw a curveball to investors with one aspect: a $50 billion share repurchasing program.
This move is often used by companies to signal that their stock is undervalued, but it’s unusual for hypergrowth companies like Nvidia to devote such a large amount to buybacks when they should be investing in research and development. Insiders have been selling shares at a historic pace since June, with CEO Jensen Huang disposing of around $600 million worth of his company’s stock.
Nvidia is attempting to signal that its stock is undervalued while its shares are historically pricey relative to its trailing-12-month (TTM) price-to-sales (P/S) ratio. Throughout history, only a few companies have approached a TTM P/S ratio of 40 before experiencing significant value losses.
Investors should be cautious and consider the warning signs. While AI has a promising future, most businesses lack a well-defined game plan to grow their sales and increase profits. This overestimation can lead to an early stage bubble in AI adoption.
History also suggests that every highly touted innovation or technology needs time to mature. It took more than a half-decade for business-to-business commerce to find its footing following the proliferation of the internet in the mid-1990s. Similarly, it will take time for businesses to figure out how best to utilize AI to meet customer needs.
In conclusion, while Nvidia’s AI-driven boom is impressive, the warning signs surrounding its share repurchase program and insider selling activity cannot be ignored.
Source: https://www.fool.com/investing/2024/09/11/nvidia-50-billion-share-buyback-smoke-and-mirrors/