Three Strong Incentives to Purchase Nvidia Shares Prior to November 20
This week signals a significant event for tech investors as the highly anticipated earnings of the year are set to be revealed: Nvidia (NVDA -2.25%) is set to unveil its Q3 figures on Wednesday, Nov. 20.
The tech giant, leading the artificial intelligence (AI) market surge, has numerous questions to address. How is it dealing with the recent hiccups at one of its primary suppliers? Is the rollout of its latest Blackwell chip progressing as planned?
More insights will be revealed on Wednesday, but there are numerous reasons to consider investing in Nvidia's stock prior to the announcement. While there's always a slim chance of some unfavorable news emerging, Nvidia currently seems to be in a position of strength that can't significantly alter its trajectory over the long term. Here are three reasons why buying Nvidia's stock is a sound decision today.
1. The Impact of Blackwell
We'll gain a better understanding of Blackwell's release, but signs point towards a successful introduction of Nvidia's newest chip iterations. Earlier this year, reports of manufacturing challenges sent jitters among investors, but it's now evident that Nvidia handled the issue efficiently, resulting in a delay of only a month or two. Blackwell is slated for delivery to customers shortly.
The chips represent a significant improvement over the already highly-powerful Hopper chips, which continue to be in high demand despite the approaching release of the next generation. Elon Musk and his xAI team have already purchased 100,000 Hopper chips and are on track to purchase another 50,000.
Being in this advantageous position, with demand for both current and future chip versions reaching a fever pitch, is quite advantageous. According to reports, Nvidia is already sold out of Blackwell chips for at least 12 months following the release.
Nvidia CEO Jensen Huang described the demand as "crazy," and the company is collaborating with Foxconn to meet that demand, establishing a new Blackwell-dedicated fabrication plant in Mexico.
2. Big Tech's Ongoing Investments
Examining recent earnings calls from Nvidia's leading clients, it's evident that the money is continuing to flow. Tech titans like Microsoft, Meta, and Alphabet are investing billions in constructing data centers capable of handling AI demands. These companies have seen a substantial rise in capital expenditure (capex) over the past year, with a significant portion of it benefiting Nvidia. This trend is likely to continue.
Meta is aiming to substantially increase its 2025 capital expenditure, with CEO Mark Zuckerberg emphasizing the potential for a substantial return on investment (ROI) from AI advancements, and suggesting that capex requirements may even need to escalate further. Alphabet spent $13 billion last quarter on data center construction and expects the same level of investment in Q4, placing it on track to surpass $50 billion in capex for the year.
3. Nvidia's Ample Free Cash Flow
Free cash flow (FCF) is a fundamental indicator of a company's financial health, and Nvidia has a substantial amount of it. Analyzing the surge in FCF over the past few years compared to its rival AMD, reveals a sizeable gap.
That is a substantial discrepancy. FCF can be utilized in various ways that can enhance a company's ability to conduct business or bring added value to shareholders, often achieving both goals. Nvidia's vast FCF resources enable it to react swiftly and effectively to market demands and actively defend its market dominance. As competitors like AMD strive to keep pace, Nvidia can direct this capital towards significant R&D investment or talent poaching.
Simultaneously, FCF can be used to repurchase shares, which is exactly what Nvidia has been doing. In the first half of the year, it repurchased $15.1 billion in shares, and last quarter, the board authorized an additional $50 billion in stock buybacks.
On Wednesday, we will discover just how much of the $50 billion has been allocated. It's evident, however, that the company is dedicated to rewarding its shareholders through stock repurchases.
After revealing the strong capital expenditure from tech giants like Microsoft, Meta, and Alphabet, investing in Nvidia's stock becomes even more compelling, as these companies continue to pour money into constructing AI-capable data centers. Furthermore, Nvidia's ample free cash flow positions the company well to capitalize on market opportunities and defend its market dominance, making it an attractive option for investors seeking financial growth.
