Nvidia Spent $20 Billion on Buybacks Last Quarter. Here's What That Means for Your Shares.

In the tech sector, stock buybacks are often associated with big, slow-growth companies that are running out of fresh ways to expand their businesses. Instead of "di-worsifying" their businesses through bad investments and acquisitions, these companies prefer to plow their excess cash into buybacks and dividends to boost shareholder value.

Nvidia (NASDAQ: NVDA), the world's top producer of discrete GPUs for the AI market, isn't often associated with big buybacks because its core business is firing on all cylinders. But in its most recent quarter, it spent a whopping $20 billion on buybacks. Let's see why Nvidia is ramping up its buybacks, and if they suggest that slower-growth days are ahead.

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When did Nvidia start to repurchase its shares?

Nvidia actually launched its first buyback program in 2005, when it still generated most of its revenue from gaming GPUs for PCs. That was considered a major milestone for the company, since it indicated it was generating enough excess cash to return to its shareholders.

Buybacks serve two major purposes. First, they tighten a stock's valuation by reducing the number of outstanding shares. Second, they offset the dilution from stock-based compensation.

Over the past 20 years, Nvidia reduced its share count by about 24% -- while its stock price surged 40,730%. Unlike other maturing tech companies that wasted cash on badly timed buybacks, Nvidia's repurchases were remarkably well-timed. Its most active buybacks occurred during the semiconductor sector's cyclical downturns and macroeconomic pullbacks, when it believed its shares were undervalued relative to its long-term growth potential.

The current situation looks similar, even though Nvidia's stock has already rallied nearly 30% year to date, trades near a record high, and has a market cap of $5.65 trillion. From fiscal 2026 (which ended this January) to fiscal 2029, analysts expect Nvidia's revenue and EPS to both grow at CAGRs of 61%. Yet its stock trades at just 15 times next year's earnings.

That's probably why Nvidia spent $40 billion on buybacks in the first half of fiscal 2027 ($20 billion in both the first and second quarters), and why it recently expanded its current buyback authorization by $150 billion to $235 billion. It expects to execute the remainder of that buyback through fiscal 2028 (which will end in Jan. 2028).

Nvidia easily covered those buybacks with its free cash flow (FCF), which surged 77% year over year to nearly $70 billion in the first half of fiscal 2027. Analysts expect its FCF to nearly double to $190 billion for the full year and surge another 72% to $327 billion in fiscal 2028. In other words, it will have plenty of cash left over for fresh investments and acquisitions. It could even raise its oft-overlooked dividend, which only yields 0.4%.

But what do those buybacks mean for Nvidia's stock?

CEO Jensen Huang claims Nvidia's expansion of its buyback plan reflects the company's "confidence in the long-term opportunity ahead." Its stock still looks cheap, but its full buyback authorization of $235 billion would only equal 4% of its current market cap.

So while that massive buyback is certainly a vote of confidence for Nvidia's stock and a testament to its cash-generating abilities, it might not move the needle on its own. Nvidia has a wide moat (thanks to the prisoner-taking software and services attached to its chips), but it still faces intense competition from cheaper rivals and custom AI chipmakers. Safety concerns or macro headwinds could also curb AI spending over the next few years.

All of those competitive, cyclical, and macro headwinds could throttle Nvidia's growth. Nevertheless, Nvidia still sells the best "picks and shovels" for the AI gold rush, and it will remain a linchpin of the market for the foreseeable future. Therefore, I think it's still a no-brainer play on the AI market -- but investors should expect some volatility in this choppy market.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.