How Nvidia can take a page out of Apple’s playbook
First, welcome to all who have joined us for the first time. Your participation in the CNBC Investing Club means a great deal to us. We aspire to get it right for you, in the same way a wonderful Club member explained this weekend as we gardened together. He couldn’t believe how much he had learned and how much he had prospered from it. I can only express gratitude to him. Here’s why — from 1983 to 1987 at Goldman Sachs and from 1987 until 2001 at Cramer & Co, I succeeded in the process of making money for the richest people in the world. It meant little to most of them. I was part of some allocation. I crushed it, for lack of a better verb, but I got thanks from only one soul — a very rich and creative one — and no one else. But that’s not the way it works now at the Club. My gardener friend expressed joy in learning about stocks. It wasn’t because the cost is a microscopic percentage of what I used to charge. It was because he could figure out why stocks went up and down. We discussed the disappointment with Microsoft and whether it should be kicked out. I expressed my doubts about the company in the age of artificial intelligence and what it could do to the core, clunky Windows product, but I doubted that Amy Hood, the incredible CFO at the cloud and software giant, would tolerate that much underperformance. I pondered whether I had come to be too close to Marc Benioff, a special man who invented a company with a product that I loved, and here I am talking about Salesforce with its $40 billion in revenue. It’s a small position in the Club portfolio and now a painful one. I want to give Salesforce and struggling Nike one more quarter — and then, I will have to try a lunch of “crow a la mode.” Nike gets the chance if only because the last quarterly conference call gave it the slim right to endure the endless pain. It’s up or nothing. Mostly, we talked about the winners, including our two “own, don’t trade” names, Apple and Nvidia . The quiet upward propulsion of Apple is a great joy. It closed at a record high of nearly $309 per share on Friday — now up roughly 13.5% year to date. However, who wouldn’t worry about the coming retirement of the spectacular CEO Tim Cook ? There are enough irons in the proverbial fire that the CEO-in-waiting, hardware specialist John Ternus, should be able to feast off the continual earnings conflagration. How about Nvidia? Let’s talk about it. Nvidia still brings me great joy. I got an egg, ham — sadly not Taylor Ham — and cheese this weekend. On my order, the cook wrote not my name but “Nvidia” on the ticket — another proud Club member. I was tickled. But we are in a “what have you done for me lately business.” I wish, during the transaction, I could have explained what must happen to get this stock to hunt again. It is undeniable that with this quarter, Nvidia has, indeed, lost its luster. It was a true blowout, but it sent the stock noticeably backward, which means that an earnings surprise for this behemoth no longer mattered. The skein of stock success has ended. The market cap is well-worn. The world heavyweight stock champion title is soon to go to another. It was swell while it lasted. Or should there be a question mark at the end of that sentence? I am not sure. But it got me thinking. What do you do about being the best, at having a tremendous surprise, and yet landing with more than a dud? You can, of course, say that the stock is up from $180 and that its ascension to a record close on May 14 of nearly $236 ( less a week before earnings last past Wednesday evening) was built not to last. I can handle that analysis, but we are talking playoffs here, and you are only as good as your last endeavor. Other stocks won. Is it time for us to admit defeat and strip the stock of its “own, don’t trade” appellation? Perhaps. But I think it is time for the company to begin a different course, one having to do with its capital allocation — a strategy that has served Apple so well all these years. A long time ago, Luca Maestri of Apple became 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 times with his more than 10-year regime were, at times, tempestuous, mostly because of my ignorance and adamance in the need to grow by acquisition. I had suggested once, a long, long time ago, that Apple should buy Netflix , something that I now think comes under the category of being lucky, not good, considering that it hung at $25 billion at the time. With a rigorous outfit like Apple, you can only live a short period of time on that prompt. Organic growth is what mattered, and Apple had it in spades. But it was never enough in the Cook era. Tim could have invented a car that runs on water, and it would not mean enough to some of the greedy shareholders and critics who often said its best times were behind it, something first heard when this $4.5 trillion company traded at about $500 billion (yes, billion with a “B”), instead of at a price that could pass Nvidia at these paces. Nvidia is still a $5.2 trillion company. Not too shabby. So, what would Luca have done with Nvidia? I think he would not have tolerated even this long a period of underperformance. He would aggressively pivot toward a dual plan of a hefty increase in the dividend each year, coupled with a monster buyback that led to more than a third of the stock being retired over a decade. I know Warren Buffett often talks about his trip to Dairy Queen — watching young people glued to their iPhones — that got him started in owning a position in Apple stock. It would have always been nothing but a curiosity if not for the $35 billion to $36 billion he accumulated beginning in 2016. It was something else entirely that made it his largest position, something that was his first love: a masterful buyback coupled with a bountiful dividend. The king-of-all-equities always proclaimed that his true love of owning a stock centered on how the company itself allowed him to become an ever-bigger part of the enterprise simply by buying back its own stock and forever sharing the proceeds and bounty that comes with that process. Apple’s products were the ante, the buyback and dividend were the sustenance. It’s time for Nvidia to admit its status as a solid grower and do more for shareholders than it already has. It has to accept that its graphics processing units (GPUs) and central processing units (CPUs) and networking products are the ante, and the buyback and dividend are the sustenance. The Jensen Huang-led chip powerhouse started the process by offering a sizable — some would say colossal — buyback and a decent-sized dividend. But neither reaches the skies that Apple presented. Nvidia must signal that it wants to shrink its float (currently at 24.2 billion shares) while increasing the buyback to backstop investors, no matter what the CPU or GPU or, for all I know, quantum computing can offer. How can Nvidia be sure to do so, given all that must be done to stay ahead? I think that it is not enough to apply current cash. Nvidia must begin a systematic reduction in investment size after the victories Jensen so often wins in the process of anointing winners. Let’s take Intel . Nvidia bought $5 billion of Intel shares at $23.28 each. Intel is now at $119 (not too far off its $129 record-high close on May 11). I think Intel goes higher. But if I were running Nvidia’s books, I would say it is time to take out the cost and play with the house’s money. That means a return that encompasses far more than the $5 billion invested. That investment can easily be applied to the buyback. Each year, more can be peeled off. Other investments can perform the same role. As each is made, others should come off. It’s not like the companies that are invested in generate all that much fealty. They still play the field. The secondaries could be a form of shareholder payback that would change the equation of the stock in the same way it did for Apple. It would supply the support that so many are not counting on from a semiconductor company because there is thought to be a law-of-large-numbers defeat in the works. Alas, there is no Buffett to take advantage of the moment. But he has enough acolytes that one must presume the shareholder base would change from somewhat sadly fickle to more of a mainstay. I am not asking for a yearly weekend of love — we have Nvidia’s annual GTC event for that — I am simply saying an epoxied set of shareholders might stop the tyranny of a wall of options that holds the stock back . Did you catch that picture of all the calls that I showed from the floor of the New York Stock Exchange? Each one works against the increase in value as the pros crush the over-exuberance, as represented by fat premiums that the amateurs create. They are gluttons for punishment. Without this capital return program, I fear that we will soon have to question the wisdom of a big position in Nvidia. No, not an exit, merely a recognition that the punching-bag nature of being a shareholder can cause an exit on each round, and I don’t want to wait around for the ref to raise the hand of a winner and new champion. Why would I think that the Apple program would work? Simply because it’s not like Apple has explosive growth. That ended years ago. It’s just the consistency of the capital return that has mattered. With that, I will return to my family and my garden on this, the appointed time of planting. We will convene 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 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. 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