Aug. 11, 2022

Nvidia And The Return Of Capital

On so many levels, Nvidia is the quintessential 21st Century Multinational Corporation. Headquarters is tax haven Delaware, offices in silicon valley, and markets throughout the world. 

 

Nvidia came public just 22 years ago and already ranks as the eleventh largest corporation by market capitalization. Its business centers around the production of those specialty computer chips known as GPUs, Graphics Processing Units that are at the heart of many games and other computer-based devices we use daily. 

 

But they certainly don't stop there. These GPUs, API, Etc., are now used by Chinese Movie Companies, new electric vehicles, like the Lamborghini picture above, and Crypto Currencies mining. 

 

It should be no surprise that a company as leading edge as Nvidia has that same leading edge approach to its corporate finance. And further, Nvidia faces the same headwinds as all major American Corporations today.

 

On Monday, Nvidia reported its latest financial results, and to say that Wall Street was less than pleased, is an understatement. The Street was looking for something they didn't find. Because their initial reaction was to drop the Stock by 10% on the day, this topped off a 6-month ride that has seen Nvidia Stock, symbol NVDA, fall by over 40%. 

 

We all know the issues. We could recite them in our sleep. Runaway inflation is killing results. So far this year, Nvidia expenses are up a whopping 35%. And like the rest of us, Nvidia can't be sure when this roller coaster ride will end. The powers that be need first to get inflation under control.

 

You've heard all that talk about how few semiconductors are making it to our shores? Well, that's Nvidia's top product. The Supply Chain is landing squarely on Nvidia's income statement. And although Nvidia indicates that they've got everything under control, I guess Wall Street doesn't think so. 

 

Remember, most modern American Multinational companies ship off their actual production lines to an overseas country. Generally, their Semiconductor Foundry is in Taiwan or, heaven forbid, China. With a sea of uncertainty between the foundry and the corporation.

 

Put it all together, and you have the picture of a company where income continues to rise. But earnings are down. Expenses, particularly the acquisition costs of those offshore chips, are growing even more. And when component prices get out of control, the bottom line suffers. And that's just what is happening at Nvidia. 

 

At this point, we've come to a critical juncture for Nvidia and, I believe, for much of Corporate America. There is a natural dividing line between how 20th Century Corporations and 21st Century Corporations operate.

 

To recap: Nvidia faces massive uncertainty. Their supply of chips is shaky. Inflation is raging, driving costs at every level higher. And there is the looming possibility of a recession impacting sales. 

 

Financially Nvidia is in pretty good shape. They have $20 billion in cash and about the same in total liabilities. In other words, their money on hand is about the same as their bills. Always the account's favorite measure of viability. 

 

So, here's how 20th Century management would act. They would hunker down. Cut expenses, and postpone hiring. These are steps that Nvidia is taking now. The 20th Century manager would not take on any additional obligations. The current uncertainty is just too great.

 

Here, Nvidia, the 21st Century managers veer off on another path. They intend to spend $17 billion on buying back their Stock. The financial press says, "returning capital to their investors." Madison Avenue couldn't do better. It has a beautiful ring to it. 

 

But bottom line, this action will drain an additional $17 billion out of the Nvidia bank account when they can little afford it. Spending hard cash for Stock doesn't make sense to me. Common Stock never has to be paid back. You don't have to pay Common Stock a dividend if you're tight financially.

 

But by entering into this repurchase program, Nvidia is supporting the Stock's current price. Hoping it doesn't go any lower. 

 

I think it's a mistake. I believe that Nvidia should start conserving capital to protect against unforeseen setbacks. I see the long-term risk to the company's viability and more important than the short-term risk in stock price.

 

But I understand this is how many 21st-century corporate financial officers view their current situation. I think many CFOs will take the same path as Nvidia. And they, too, will delve into corporate buyback programs. At just the time, they should conserve capital. 

 

Let's hope for all our sake that any coming recession will be mild.

 

Economic News

 

The headline news yesterday was the latest report on Consumer Prices, a dramatic cooling in inflation. Inflation for the year fell to 8 1/2%, considerably better than the 9.1% for June. The question is, why?

And the immediate answer is the dramatic drop in the price of gasoline. Gas fell by over 7 1/2%, just on the month. And this was more than sufficient to drop overall inflation. Yes, we're still seeing price increases in some of the catch-up areas of the economy. Food was higher, as was the price of electricity and some financial services. But this underscores the importance of a sound energy policy, a policy that would promote abundantly low-cost oil and gas. Something that we don't have right now.

Incidentally, if you don't think that energy is driving this worldwide wave of inflation, take a look at Russia. A country in which oil plays an out-sized role. Russian prices declined last month on the back of lower-priced oil.

Energy remains the key to inflation.

In just a few minutes, we will get the latest on inflation at the wholesale level, as they will announce the newest Producer Price Index. The latest Initial Claims follow them for Unemployment Insurance, expected to be little changed from last week, or about a quarter million newly unemployed.

It's another big day for earnings reports, as over 300 companies are on the calendar. So far, Dillard's Department Store has led the way, getting a positive response to their results. Also reporting positive numbers have been US Foods and Privia Health Group. Not so well received has been Cardinal Health. A pharmaceutical wholesaler.