Nvidia's record stock buyback funded by cash from the data center boom

The chipmaker Nvidia announced that it’s going to buy back even more of its own stock over the next couple years — a record $150 billion more on top of the $85 billion already promised. It’s the biggest buyback in history, surpassing Apple’s previous record.

Buying back stock is one of a few ways a company can return cash to shareholders, according to Nick Guest, an assistant professor of accounting at Cornell. Another way is that a company could pay a dividend for every share.

“They tend to be regular, and the market tends to build up an expectation for them, so that if you pay a dividend this quarter, you're going to pay at least that much in future quarters,” Guest said.

But buying shares from shareholders is more flexible, Guest explained. So stock buybacks have become the favored way for companies with excess profits to share them.

“They said, ‘Hey, we don't have that many investment opportunities. We can't use all this cash right now, so we're going to give some of it back to you, investors, and then you can decide what to do with it,’” Guest said.

So far, Apple has been the leader in stock buybacks. But Alphabet, Meta, and Oracle also spent heavily to repurchase their own shares — at least, until this year.

“We're seeing something I never thought we would see, which is tech companies, which formerly were just bringing in the cash, now are spending huge amounts of cash on AI,” said Erik Gordon, a business professor at the University of Michigan.

The companies spending big on data centers have seen the buildout eat into their free cash flow. Some are selling new stock, and most are borrowing to fund construction.

“Companies are filling the dump trucks with money and sending it to Nvidia to buy their chips. Nvidia is getting dump trucks of money every day,” said Gordon. “That's why it can do stock buybacks.”

Of course, Nvidia doesn’t have to buy back stock with its excess profits. Jacob Bourne, a tech analyst at eMarketer, wondered if the company could spend the money on something else.

“Why is this the best bet for Nvidia right now, as opposed to acquiring more AI startups, or investing more in chip development?” Bourne asked.

But Nvidia is doing those things, too, according to Daniel Newman, an analyst with Futurum.

“When you have a balance sheet that looks like Nvidia, you have the optionality to return to shareholders, and you have the optionality to invest in the ecosystem,” Newman said.

Nvidia has committed hundreds of billions to the chip supply chain, as well as invested in AI companies that then turn around and spend their money on more Nvidia chips.