Nvidia's $1B stock buy-back

[Geo]

http://www.beyond3d.com/content/pr/27

Whee. Might suggest they don't forsee any signficant buying sprees ahead. And, usually, in addition to making shareholders happy such buybacks can help with takeover protection, I believe.

 

[digitalwanderer]

I was gonna say; does this mean they're buying back their own stock because they think it'll become more valuable or to make their stock stronger?

I don't understand these financial things.

 

[Geo]

Any time demand exceeds supply in a free market, the price is going to go up, right? Same with stocks. When you've got a bunch of money in the treasury for which you don't forseee an immediate or even mid-term need for, it's an easy way to add "Shareholder value".

 

[Twinkie]

I was gonna say; does this mean they're buying back their own stock because they think it'll become more valuable or to make their stock stronger?

I don't understand these financial things.

Dont worry, your not alone.. :smile:

 

[digitalwanderer]

Any time demand exceeds supply in a free market, the price is going to go up, right? Same with stocks. When you've got a bunch of money in the treasury for which you don't forseee an immediate or even mid-term need for, it's an easy way to add "Shareholder value".

So it's not just a protective move?

 

[Geo]

So it's not just a protective move?

Well, that it gives you a two-fer isn't a bad deal either, right?

Look at AMD's buyout of ATI and you'll find that AMD credited as part of the value the cash that ATI had on hand.

 

[MfA]

buybacks can help with takeover protection

Quite the opposite, supposing the market reacts rationally for a moment then the value of all outstanding stocks goes down even if the value of a single stock goes up. NVIDIA is taking 1 Bn out of it's assets and giving it to shareholders, it's nice for the shareholders but it still removes assets from the company and makes it cheaper to buy a controlling share of the stocks.

PS. hmm, I guess if the majority of the shares are not being traded it will cement the majority share holders even firmer into power. It's good for them but not necessarily good for the company or other share holders. I'd call it majority share holder protection. Also, it is even nicer for option holders with an exercise date after the stock buyback goes into effect, among which a lot of NVIDIA employees I would imagine. All in all, between options and the benefits to majority share holders stock buybacks seem a bit shady to me. A necessary evil perhaps because of taxation rules and investor mental retardedness, fixation on income per share, but regrettably so. In principle dividend is the better way to do this because it avoids conflict of interest issues.

 

[trinibwoy]

Quite the opposite, supposing the market reacts rationally for a moment then the value of all outstanding stocks goes down even if the value of a single stock goes up. NVIDIA is taking 1 Bn out of it's assets and giving it to shareholders, it's nice for the shareholders but it still removes assets from the company and makes it cheaper to buy a controlling share of the stocks.

Don't think that's totally accurate. A stock buyback is similiar to a cash dividend and sends similiar signals. They can do it for several reasons - one of them being a distribution of retained earnings like geo suggested which is a little gift to investors. Another reason could be to bolster EPS which would be a good thing given the dilution caused by the recent split. And the most obvious is that Nvidia thinks the stock is undervalued.

You're right that the value of the firm is impaired but the positive signals about future prospects should more than offset any rational depreciation in stock price. A company like Nvidia isn't valued primarily on its asset base or book value - its growth and investment opportunities are just as important.

 

[MfA]

Don't think that's totally accurate.

As I said, "supposing the market reacts rationally". It's losing assets.

Another reason could be to bolster EPS which would be a good thing given the dilution caused by the recent split.

In supposing the market reacted rationally I was by extension then also supposing it didn't care about EPS

You're right that the value of the firm is impaired but the positive signals about future prospects should more than offset any rational depreciation in stock price.

It's giving giving away assets to share holders and disproportionally benefiting majority share holders and stock option holders. It's seen as a positive signal because investors are programmed by the media to see it as such.

A company like Nvidia isn't valued primarily on its asset base or book value - its growth and investment opportunities are just as important.

A buyback decreases a companies size (assets) and also it's ability to benefit from investment opportunities, since investment require assets. It's a lose/lose situation for a company really.

 

[trinibwoy]

It's giving giving away assets to share holders and disproportionally benefiting majority share holders and stock option holders. It's seen as a positive signal because investors are programmed by the media to see it as such.

So you're arguing that a cash distribution today is not more valuable to an investor than a claim on future earnings? Also, each share an investor holds now has a greater claim to those future earnings - you now own more of the company (even though the company itself is worth less).

A buyback decreases a companies size (assets) and also it's ability to benefit from investment opportunities, since investment require assets. It's a lose/lose situation for a company really.

Well Nvidia certainly seems to have more cash than investment opportunities at the moment. And even if there are abundant opportunities out there they would still want to maintain a certain capital structure so dumping cash into every venture isnt the way to go. And again, they might simply think it's a good investment. How is it more beneficial to the shareholder for a company to just hold onto cash?

 

[INKster]

Another possibility would be that all of this is just a clever ploy to increase share value in order to do an all-stock/mostly stock trade when they need to purchase/merge with a more "visible" company (compared to what they have been absorbing lately -PortalPlayer, Pace Soft Silicon, Hybrid Graphics, Uli, Stexar, MediaQ, iReady, Exluna, 3dfx, etc-).
I would be on the lookout for large scale mergers & acquisitions in the next, say..., 12 to 18 months.

 

[MfA]

So you're arguing that a cash distribution today is not more valuable to an investor than a claim on future earnings?

For an investor with stocks in the company yes, for an investor looking to buy stocks in the company after the buyback no.

A stock buyback is blatantly not an investment. Think about it for a moment ...

I simply don't really like the disproportionate way in which buybacks rewards some of the share and option holders. Apart from that I think it's good for the present shareholders. In a perfect world without idiots running the show dividends would simply be better.

 

[Arun]

I simply don't really like the disproportionate way in which buybacks rewards some of the share and option holders. Apart from that I think it's good for the present shareholders. In a perfect world without idiots running the show dividends would simply be better.

The fundamental difference, however, is that a dividend will reduce your market capitalisation. A stock buyback should in theory keep it constant, so that you remain in a position to buy other companies via stock. At least as far as I can see...

BTW, I listened to the May 16th and May 22th replays of the NVIDIA webcasts with Michael Hara (Investor Relations) yesterday, and one point that came up is what the timeframe in which these buybacks would happen.

The response was that right now, they're generating $200-$250M in cash flow per quarter. So they expect to fund these buybacks over a year and mostly through new cash, rather than by hurting their current balance sheet. They might do some more in the first months though, if they feel the stock price is more attractive than it will be a year from now.

Basically, I read that as implying they're happy with keeping about $1B in cash on their balance sheet, and that they'll just buy-back their own stock with the rest. I guess this also allows them to do small acquisitions (<=$250M) through cash easily, while keeping a proper position to do a stock acquisition if they had their eyes on anything bigger. Decent trade-off, I guess.

 

[Davros]

If they had any sense they would buy ati stock instead
and at the shareholders meeting vote that the next product will be a repackaged radeon 8500 retailing at $500 - bingo nvidia now has nearly all of the graphics card market

 

[dizietsma]

If you buy back stock then this has two effects

1) You save on dividend payout.
2) It bolsters the current share price.

So I am not sure how you can claim it is a lose/lose situation. Also, you could give some stock to employees as an incentive.

 

[Geo]

So I am not sure how you can claim it is a lose/lose situation. Also, you could give some stock to employees as an incentive.

Yeah, this is likely part of it, tho presumably not so much a $1B worth. Tech industry has always used stock as incentive. If you don't do buy backs then you're diluting what's out there with those programs.

 

[Sxotty]

This is strange, I would think they could some up with something better to spend it on. Especially since they have a high price now. If this was after they launched a bad product and had another good one in the wings it would make more sense to me.

 

[_xxx_]

If this was after they launched a bad product and had another good one in the wings it would make more sense to me.

What if they're really _that_ confident about their next product? Would that explain anything? (I'm a total newb considering stock market and all that, so I might ask stupid questions here).

 

[Geeforcer]

If they were not confident about their future product, doing a buyback now would seem counterintuitive.

 

[MfA]

The fundamental difference, however, is that a dividend will reduce your market capitalisation. A stock buyback should in theory keep it constant, so that you remain in a position to buy other companies via stock. At least as far as I can see...

The shares which are bought back are effectively destroyed, the company doesn't own itself.