How Nvidia can take a page from Apple’s playbook
First of all, welcome to all those who have joined for the first time. Your participation in the CNBC Investing Club means a lot to us. We want to make it right for you, the same way a wonderful Club member described it this weekend as we farm together. He couldn’t believe how much he had learned and how successful he was at it. I can only express my gratitude to him. Here’s why – from 1983 to 1987 at Goldman Sachs and from 1987 to 2001 at Cramer & Co, I succeeded in making money for the world’s richest people. It meant little to most of them. I was part of a certain assignment. I crushed it, for lack of a better action, but got thanks from only one soul – a very rich and wise one – and no one else. But that’s not how it works now at the Club. A gardener friend of mine expressed delight in learning about stocks. It wasn’t because the cost was a small percentage of what I was charging. It was because he could figure out why stocks went up and down. We discussed the disappointment with Microsoft and whether it should be released. I expressed my doubts about the company in the age of artificial intelligence and what it could do to the core, flawless Windows product, but I doubted that Amy Hood, the amazing CFO of the cloud and software giant, would tolerate that under such a performance. I reflected that I had become very close to Marc Benioff, a special man who founded a company with a product that I loved, and here I am talking about Salesforce with its $40 billion revenue. It is a small position in the Club’s portfolio and it is now painful. I want to give struggling Salesforce and Nike one more quarter – and then, I’ll have to try the “crow a la mode” lunch. Nike gets a chance if only because the final conference call of the quarter gave a little right to endure chronic pain. It’s high or nothing. In particular, we talked about the winners, including two of our “proprietary, non-commercial” names, Apple and Nvidia. Apple’s quiet ascension is a great joy. It closed at a record high of nearly $309 per share on Friday — now up nearly 13.5% year to date. However, who wouldn’t be worried about the impending retirement of the amazing CEO Tim Cook? There are enough irons in the fire to mean that the CEO-in-waiting, hardware expert John Ternus, should be able to indulge in a steady firestorm. How is Nvidia? Let’s talk about it. Nvidia still brings me great joy. I had egg, ham – sadly not Taylor Ham – and cheese this weekend. On my order, the chef did not write my name but “Nvidia” on the ticket – another proud member of the Club. I was tickled. But we are in the “what have you done for me lately” problem. I wish, at the time of the transaction, I could explain what needs to happen for this stock to rebound. It cannot be denied that this quarter, Nvidia, has lost its luster. It was a true blowout, but it sent the stock back significantly, meaning the behemoth’s earnings surprise is no longer relevant. The stock’s skein of success is over. The market cap is well worn. The title of world heavyweight champion will go to another. It swelled up while it was going on. Or should there be a question mark at the end of that sentence? I’m not sure. But it got me thinking. What do you do with being the best, with being the biggest surprise, and yet still being more than a dud? You can say that the stock rose from $180 and that its climb to a record close on May 14th around $236 (less than a week before last Wednesday evening’s earnings) was built not to last. I can handle that analysis, but we’re talking about the playoffs here, and you’re only as good as your last effort. Some stocks won. Is it time to admit defeat and strip the stock of its “own, don’t trade” moniker? Maybe. But I think it’s time for the company to start a different course, which is about the allocation of its capital – a strategy that has worked well for Apple over the years. A long time ago, Luca Maestri of Apple was the first CFO to truly understand the power of raw, hard cash on the balance sheet and what it could mean for shareholders. My life and the times with his kingdom for more than 10 years, at times, were stormy, mainly because of my ignorance and insistence on the need to grow by gaining. I had suggested once, long, long ago, that Apple should buy Netflix, something that I think now comes under the category of being lucky, not good, considering that it was hanging on $ 25 billion at that time. With a firm like Apple, you can only live for a short time on that material. Organic growth was what mattered, and Apple had it in spades. But it was not enough in Cook’s time. Tim could have invented a car that runs on water, and it would not say enough to some of the greedy shareholders and critics who often say that their best times are behind it, something that began to feel when this $ 4.5 trillion company traded for almost 500 billion dollars (yes, billion with a “B”), instead of a price that could exceed Nvidia in these ways. Nvidia is still a $5.2 trillion company. Not too shabby. So, what would Luca do with Nvidia? I think he wouldn’t be able to endure this long period of not doing well. He would have headed a two-pronged plan of massive budget increases each year, coupled with massive capital reinvestments that resulted in more than a third of the stock going out of business within a decade. I know Warren Buffett often talks about his trip to Dairy Queen — watching young people glued to their iPhones — that led him to start owning a position in Apple stock. It would remain nothing but a curiosity if it weren’t for the $35 billion to $36 billion it has accumulated since 2016. It was the other thing that made it his biggest position, the thing that was his first love: smart returns coupled with high dividends. The king of all-equities has always declared that his true love of owning a stock lies in the way the company itself allows him to be an ongoing part of the business simply by buying its stock and always sharing in the profits and gains that come with that process. Apple products were the ante, buyback and dividend was a way of life. It’s time for Nvidia to acknowledge its status as a strong farmer and do more for shareholders than it already has. It must accept that its graphics processing units (GPUs) and central processing units (CPUs) and network products are startups, and returns and dividends are livelihoods. The Jensen Huang-led chip powerhouse started the process by offering a large – some would say too large – buyback and a decent-sized dividend. But it also doesn’t reach the sky that Apple presented. Nvidia must show that it wants to reduce its float (currently at 24.2 billion shares) while increasing the return of money to backstop investors, whether CPU or GPU or, for all I know, quantum computing can provide. How can Nvidia be sure to do so, since everything has to be done to stay ahead? I think it is not enough to use current cash. Nvidia should begin a systematic reduction of the size of the investment after defeating Jensen who often benefits from the process of anointing the winners. Let’s take Intel. Nvidia bought $5 billion of Intel shares at $23.28 each. Intel is now at $119 (not too far from its record high of $129 on May 11). I think Intel is going higher. But if I were using Nvidia’s books, I’d say it’s time to shell out the cost and play with the house’s money. That means a return that includes well over $5 billion invested. That investment can easily be used for a buyback. Each year, more can be peeled. Other investments can play a similar role. As each one is done, others must come out. It’s not like investee companies do all that. They are still playing the field. Secondaries can be a form of shareholder return that can change the stock equation in the same way it did for Apple. It could provide support that many do not trust in a semiconductor company because there is thought to be a significant loss in operations. Alas, no Buffett can take advantage of this moment. But he has enough acolytes that one has to think that the shareholder base will change from a pathetically volatile one to a massive one. I’m not asking for an annual Valentine’s weekend – we have Nvidia’s annual GTC event for that – I’m just saying that an epoxyed set of shareholders might stop the wall of options pushing the stock back. Did you get that picture of all the calls I showed you from the floor of the New York Stock Exchange? Each works against price increases as experts crush oversupply, as shown by oil premiums created by novices. They are gluttons for punishment. Without this capital return plan, I fear that we will soon have to question the wisdom of a large position in Nvidia. No, not an exit, just realizing that the punching-bag nature of being a shareholder can cause exits in each round, and I don’t want to wait for the attorney to raise the hand of the winner and the new champion. Why would I think Apple’s plan would work? Just because it’s not like Apple has explosive growth. That ended years ago. It is only the consistency of the capital return that matters. With that, I will return to my family and my field this time, the appointed time for planting. We will call a Club meeting this week. I hope you will join us. Jim Cramer’s Charitable Trust is long CRM, NKE, AAPL, NVDA. (See here for a full list of 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 stock in his charity portfolio. When Jim talks about a stock on CNBC TV, he waits 72 hours after issuing a trade warning before making a trade. THE PRIVATE INFORMATION OF THE BURNING CLUB IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AND OUR PRIVACY POLICY. NO LEGAL LIABILITY OR OBLIGATION EXISTS, OR IS CREATED, BY YOUR ACCEPTANCE OF ANY INFORMATION PROVIDED BY CONTACTING THE INVESTMENT CLUB. NO PARTICULAR RESULT OR INTEREST IS GUARANTEED.
