Here are 2 underappreciated positives from Nvidia's stellar earnings
Source
Despite another remarkable earnings report, Nvidia still isn't getting the respect it deserves. Sure, shares are up more than 9% on Thursday. But the fact that they are still short of a new all-time high is, well, ridiculous. That's true for two big reasons, among the myriad of others; first, Nvidia CEO Jensen Huang on Wednesday night laid out the long-term math on data centers; second, the company gave what Jim Cramer called a "wink and nod" on the pace of capital returns going forward. Data center math Recall that Nvidia earlier this month committed to a $105 billion backstop for a new OpenAI data center campus in Ohio. The magnitude of all of Nvidia's financial commitments — from financing to strategic agreements to equity investments — has had Wall Street on edge. The concern is not only based on whether Nvidia will see returns on all these investments and whether the companies will be able to pay the bills. But there's also a criticism that they are all just a bunch of circular deals, propping up demand for Nvidia's chips that otherwise wouldn't be as strong. While knocking down those bearish arguments, Nvidia especially stressed the opportunities that these investments offer. "We know some will call this circular financing. We see it differently," CFO Colette Kress said on Wednesday's earnings call. "We believe these investments, measured against the strength of their demand, the business they create for us, the ecosystem they build on Nvidia's platform, and the equity returns on our invested capital, will be excellent." As part of the earnings release, Nvidia made its case for why the OpenAI data center in Ohio is so lucrative. "Each generation of Nvidia infrastructure deployed at PORTS-Pike could represent approximately 1.5 million Nvidia GPUs, or approximately $150 billion to $200 billion in Nvidia revenue. Over 20 years, we expect the site can support multiple infrastructure upgrade cycles." To get a sense of the risk/reward, if we were to assume that its graphics processing units (GPUs) have useful lifespans of five to six years, you've got about three to four generations in that 20-year timeframe. So, let's call it three generations, due to the longer useful lives of past and certainly future generations. Under that assumption, we're looking at a revenue opportunity of $450 billion to $600 billion over that time, all from one campus. Don't forget that Nvidia is only on the hook for completed data centers, not those still under construction, and the backing is for the assets in the data center and the facility itself, not the lease payments. That's important because, as was stressed on the call Wednesday night, Nvidia's hardware is "fungible" — a word used six times. Fungible in this sense means usable by different customers for a wide range of workloads, including training and day-to-day use, known as inference. That's why Jim was so bullish on Nvidia's chips and software, saying earlier Thursday on CNBC , "The profits are here now, customers are using them, and they're making a killing." Discussing the OpenAI backing, the merits of it and the means Nvidia has to offset the risk, Kress also said on the call, "Our risk is limited. The Nvidia compute platform is fungible, and durable and can be redeployed to support other customers. For context, we expect demand from the AI labs for which we expect to leverage our balance sheet to contribute toward roughly a quarter of our business next year. [The remaining compute] we ship will be consumed by investment-grade customers or those that are backed by one." While we understand the concern that Nvidia's commitments are large, we think they make sense given the backdrop and the business outlook. After all, Nvidia on Wednesday forecasted 70% revenue growth in fiscal 2028; the Street thought more like 45%. And, just as we predicted Wednesday night, when we raised our Nvidia price target, analysts are in fact raising their estimates for Nvidia. It's happening big time. Buybacks That brings us to our second point, the buybacks. These numbers should make clear that Nvidia stands to generate a massive amount of free cash flow over the next decade, should everything go mostly to plan. On the call, Kress said, "Relative to our plan to return 50% or more of free cash flow, we have returned 60% on a year-to-date basis and going forward, we intend to increase and return excess free cash flow, net of strategic uses." What we're wondering is if her "return excess free cash flow, net of strategic uses" is Nvidia's version of former Apple CFO Luca Maestri's famous "net cash neutral over time" mantra for shareholder returns. Like Nvidia, Apple got its start in hardware, then moved into services and software. That move granted them higher margins along with an incredibly reliable recurring revenue stream. With AI adoption now advancing at a breakneck speed, and Nvidia pushing ever deeper into the enterprise software space — just Thursday morning there are reports that it is looking to acquire open-source AI platform Hugging Face for $12.9 billion — we think now is the moment for Nvidia to follow in Apple's buyback footsteps. Jim has been pushing Nvidia to embark on an Apple-style buyback for a while now. Back in May , Jim put pen to paper and outlined his case in his weekly column. Looking at our market data provider FactSet, Nvidia is currently estimated to deliver $198 billion in free cash flow in its current fiscal year 2027. That number jumps to about $308 billion in fiscal 2028, $416 billion in fiscal 2029, and $462 billion in fiscal 2030. Given that the official 50% commitment is for buybacks and dividends, and that Kress appears ready, willing, and able to return more than that, we're going to use 50% as the basis for buybacks between now and then. If that proves to be the case, we are looking at buybacks larger than the market cap of 80% of S & P 500 companies. We will demonstrate how this can benefit Nvidia's stock. We will use fiscal 2027 full-year estimates as our starting point, along with Thursday's midday market price for shares of about $225 each. According to FactSet, there are now about 24.2 billion Nvidia shares outstanding. If we assume another $50 billion in buybacks this year, based on over $113 billion in free cash flow estimates for the rest of this fiscal year, we exit the year with a little under 24 billion shares outstanding. We'll go with a round 24 billion for the sake of being conservative. So, let's see what Nvidia can do to that over the next three years if 50% of free cash flows go directly to the share repurchase program, assuming all else is equal. By all else equal, we mean assuming no further organic sales or earnings growth — which is unlikely to be the case since you aren't going to get all that free cash flow growth without earnings growth — but the goal is to remain conservative and bake in a margin of safety. We'll use the free cash flow growth estimates but keep earnings static. What we find is that Nvidia can increase earnings per share by 3%, 4%, and 5% in each of the next three fiscal years, respectively. If the buybacks come in closer to 60% of free cash flow, that EPS growth increases to 4%, 5%, and 6% in each of the next three years, respectively. This matters because, over the long run, stock prices follow earnings-per-share growth. Additionally, by the end of its fiscal 2030, Nvidia will have reduced its share count by about 11%; at a 60% buyback rate, we're looking at a 13% reduction. Of course, if the share price increases, the buybacks would pull out fewer shares; whereas if the share price declines, they would pull out more shares. This back-of-the-envelope exercise also isn't factoring in any stock-based compensation that would, at the margins, increase the number of Nvidia shares outstanding. But, at the magnitude of buyback we're projecting, the offsetting increase from SBC is small. This is also for just the next three years, and assumes no further growth in net income, even as we already know that FY28 revenue is supply constrained to an incredible 70% increase over FY27. The actual EPS growth rate that Nvidia would see from the combo of net income increases and a reduced share count figures to be much higher than what we've outlined above. Bottom line Nvidia's report on Wednesday not only increased our confidence in the sustainability of AI demand for several years into the future. It also helped to alleviate concerns regarding the level of financial commitment Nvidia has taken on to help advance the buildout and provided valuable insight into just how high free cash flow can go. Combined with Kress's encouraging commentary on where capital returns can go from here, we think Thursday's stock advance is not big enough. And therein lies the opportunity. (Jim Cramer's Charitable Trust is long AAPL and NVDA . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.