Nvidia Announces a Record $150 Billion Buyback Increase: What a Buyback Means for Everyday Investors

You may own a slice of Nvidia without realizing it, so here is what this headline means for your money.

What happened

On Monday, Sept. 28, chipmaker Nvidia announced it was adding $150 billion to its stock buyback program. The New York Times and Yahoo Finance both reported that the addition brings Nvidia's total remaining buyback authorization to $235 billion. Nvidia said it was the largest increase to a share repurchase authorization in history.

It is the second big increase this year. The Times reported that about four months earlier, Nvidia's board approved an $80 billion increase.

Nvidia CEO Jensen Huang said, "Nvidia's growth is being driven by a once-in-a-generation platform shift to AI and accelerated computing," and added that the authorization "reflects our confidence in the long-term opportunity ahead."

Nvidia's shares rose on Monday even as the broader stock market fell, according to Yahoo Finance.

What is a stock buyback?

A stock buyback, also called a share repurchase, is when a company uses its own cash to buy back its shares from the market.

Here is a simple way to picture it. Imagine a pizza cut into 10 slices, and you own one slice. If the owner buys back two slices and removes them, the pizza is now cut into eight slices. Your slice is now a bigger share of the whole pie, even though you did nothing.

Companies do buybacks for a few reasons:

• To return cash to shareholders. It is an alternative to paying a dividend, which is a cash payment to shareholders.
• To signal confidence. Management may believe the stock is a good value.
• To offset new shares given to employees as pay.

A buyback "authorization" is permission from the board to buy back up to a certain amount. It does not mean the company must spend it all right away, or at all.

Why Nvidia can afford it

Nvidia makes chips that power many artificial intelligence systems. The Times reported that Nvidia is the world's most valuable public company, worth about $5 trillion, and that it recently reported quarterly revenue of $96.22 billion.

Yahoo Finance noted that Nvidia's stock trades at about 24 times its expected earnings. That measure, called the forward price-to-earnings ratio, compares a stock's price to the profit the company is expected to make. For comparison, the S&P 500 as a whole trades at roughly 19 to 20 times.

What this means for your wallet

You may already own Nvidia. If you have a 401(k), IRA or brokerage account with an S&P 500 index fund or a total market fund, part of your money is likely invested in Nvidia, since it is one of the largest companies in those indexes. What happens to big companies like Nvidia can move your balance.

Buybacks are not a guarantee. A buyback can support a stock's price, but it does not protect you from losses. Stock prices depend on profits, the economy, interest rates and investor mood. On the same day as the announcement, the broader market fell as Treasury yields rose.

Be careful with headline-driven buying. Big news can create a rush to buy a single stock. Putting too much money into one company raises your risk if that company stumbles. Many investors choose broad index funds to spread their risk across hundreds of companies.

Think long term. For most people, steady contributions to a diversified fund over many years matter far more than any one company's announcement.