An inside look at Nvidia’s (NVDA) stock valuation and its cash-generating machine explains why the AI chip heavyweight can justify its staggering $150 billion stock buyback plan, the largest ever. Revenue has surged, topping a record $96.2 billion last quarter, up 106% from a year ago, as demand for its AI chips continues to accelerate. As the chart below from AlphaSpace shows, the company’s share price has risen alongside its rising quarterly numbers. Read more: What Nvidia’s $150 Billion Stock Buyback Means for Shareholders and Potential Investors Nvidia’s Quarterly Earnings Versus Stock Price That revenue has become an avalanche of free cash flow — the money left over after operating and capital expenses. As a fabless company, Nvidia outsources chip manufacturing, so capital expenditures barely register against the billions in operating cash flow it generates each quarter. Over the past five years, share buybacks have grown in tandem with free cash flow, as shown in the chart below, derived from data from Yahoo Finance. Nvidia’s operating cash flow (yellow), free cash flow (purple), capital spending (green), and share buybacks (blue) Last quarter, the company’s free cash flow fell by more than half, mainly because accounts receivable soared by more than $22 billion. The sales were accounted for, but the cash had not yet been collected. Nvidia also took inventory ahead of the Vera Rubin launch. Meanwhile, the company’s future P/E ratio has declined since August 2024, as noted by Yahoo Finance executive editor Brian Sozzi. The trailing multiple tells a similar story: The trailing P/E ratio has compressed as earnings growth has outpaced the stock’s gains, as shown in AlphaSpace’s chart below. Nvidia’s share price vs. its price-to-earnings ratio. Nvidia’s share buyback plan “underscores the company’s confidence in the growth prospects of AI investing and its view that its shares are attractively valued,” said Hendi Susanto, portfolio manager of Gabelli Funds’ GGTL ETF. “It should also reinforce the investment thesis that heavy spending on AI infrastructure is here to stay,” he added. The company’s larger buyback is part of its commitment to return money to investors. Earlier this year, CEO Jensen Huang said Nvidia would return “50% or more of free cash flow to our shareholders this year, next year and beyond.” Inés Ferré is a senior business reporter at Yahoo Finance. Click here for an in-depth analysis of the latest stock market news and events influencing stock prices. Read the latest financial and business news from Yahoo Finance.
