Nvidia

Nvidia generally allocates capital well. It plows substantial resources (R&D) into next-generation product development, which has repeatedly paid off in new chips (e.g. Hopper/Blackwell for AI) and technology leadership.

Operating expenses (including R&D) have risen, but at a fraction of revenue growth, yielding massive operating leverage (Op profit up 174% YoY in Q4 FY2024). More recently, Nvidia has begun returning cash to shareholders: it initiated a modest dividend and a very large share-repurchase program.

For example, in Q1 FY2025 Nvidia bought back 9.9M shares for $8.0B, with $14.5B still authorized. This largely offsets dilution from employee stock compensation and shows discipline in buying back stock at opportune times.

We judge its capital allocation as strong: high-return investing in products, complemented by disciplined buybacks, and minimal obsession with risky acquisitions. One note is the heavy R&D and comp expense. Stock-based comp is sizable, but the company offsets it.

Large past bet (Arm acquisition) failed due to regulators, but the cancellation itself cost little. In sum, Nvidia’s capital employed yields extremely high returns (>>20%), and its use of excess cash is shareholder-friendly.