NVDIA AGM to Shed Some Light on Investors’ Reward

As it heads into its annual shareholder meeting, Nvidia is in an enviable position, but it does open the question about why the company isn't sharing the windfall with investors.

Where's the Money?

Generally, a company's AGM isn't a major news event, with the resolutions proposed by the CEO passed as a matter of course. One of those resolutions is deciding on how much to return to investors, through dividends and share buybacks. The fact that Nvidia's CEO hasn't proposed either options ahead of this meeting has raised some eyebrows. Most companies in this position would be looking to reward investors, but it seems that management is simply relying on the high share price. That is coming at the cost of hurting the company's valuation and potential long-term share price.

Nvidia steadily grew its dividend right up until the tail-end of the pandemic, when the dividend was at $0.16. A combination of factors, including chip shortages and the changing demand for graphics cards as ETH moved away from proof of were, led to the company's margins being seriously crimped. It cut the dividend by 75% to $0.04/shr. Since the end of last year, the company has benefitted from the surge in demand for AI, which has not only boosted the share price. The company's EPS is up 28% compared to last year. But free cash flow (FCF) almost doubled last year, which is key for this analysis, because that's usually the source of funding for dividends and share buybacks. Adjusted EPS, however, has fallen 20% compared to the prior year.

A Bet on the Future

Almost everyone agrees that AI is the next big thing in tech, but that doesn't mean Nvidia can maintain its dominance. CEO Jensen Huang seems to share that view, noting that there has been surging demand for its products, which require substantially ramping up production. That requires aggressive capital expenditure to build out and retrofit for accelerated computing the existing trillion-dollar data centre infrastructure. If the company can keep its position in the AI field, it could end up justifying the P/E ratio of 222.

A correction after a surge of this magnitude is logical. The weak valuation opens the door for increased volatility as interest in the shares is driven by expected continued growth in the share price and not interest in a dividend yield of just 0.04%. But if the company can manage to maintain its strong cash flow growth, it can set up the conditions for substantial growth in its dividend and valuation by simply returning to its pre-pandemic payouts.

NVDA Left Flag Behind

The share price of NVDA has left a flag pattern behind, with the measured move off the breakout swing implying a short-term upside to $465. Rising past $437 might see the guideline play out, should the round $450 level give way. Conversely, sliding under the $400 base might see increased shorts towards the flag low of $373.

Key Takeaways

Nvidia's upcoming annual shareholder meeting has raised questions as to why the company is not sharing its windfall with investors, as most companies in their position would be looking to reward shareholders. Nvidia has not proposed options for returning money to investors through dividends or share buybacks, which may hurt the company's long-term share price and valuation. The surge in demand for AI has benefitted the company, but its adjusted EPS has fallen 20% compared to the prior year, as the CEO notes the need for substantial capital expenditure for accelerated computing. If NVDA experiences strong cash flow growth, it can set up the conditions for substantial growth in its dividend and valuation by returning to its pre-pandemic payouts.