BofA: Nvidia's Valuation Attractive, Stock Trades at Significant Discount to Free Cash Flow

According to a report by Seeking Alpha, as Nvidia (NVDA-US) prepares to release its second-quarter earnings and announces a $105 billion commitment to support OpenAI, Bank of America says the tech giant's valuation is currently 'attractive'.

Bank of America analyst Vivek Arya stated in a note to clients regarding Nvidia's commitment to OpenAI: 'The strategic intent is clear: Nvidia is committed to the transformative nature of AI and ensuring every input—including chip supply, land, power, and data center shells—is supported, especially for disruptive non-investment-grade customers like frontier labs and neo-clouds.'

'The current market environment makes this worthwhile: robust GPU leasing prices, scarce compute supply, and Nvidia's industry-leading free cash flow generation capability. This also diversifies Nvidia's business beyond public cloud hyperscalers, which are developing their own competitive custom chips.'

Arya maintains a 'Buy' rating on Nvidia with a price target of $350.

While Nvidia is attempting to reduce its reliance on hyperscalers, this also increases the company's risk. Arya explained that if AI demand slows, Nvidia's growth rate and balance sheet could come under pressure. He expects the company to provide more details when it reports quarterly results at the end of this month.

Arya notes that even after factoring in the added risks, Nvidia's stock is trading at a 34% to 50% discount to free cash flow.

The company has committed to returning 50% of its free cash flow to shareholders through stock buybacks and dividends. If valuation multiples similar to those of AMD (Advanced Micro Devices) (AMD-US) and Marvell Technology (MRVL-US) were applied to Nvidia, the company's stock price would rise significantly.

Arya added: 'Increasing buybacks could lift the implied free cash flow multiple. Nvidia's investments in the ecosystem—especially in disruptive frontier labs and neo-clouds—are critical to accelerating the AI cycle, but these investments could also lead to lower earnings quality and suppressed trading multiples.'

'In our view, the most effective response may be to increase cash returns to investors. Given that Nvidia currently allocates 50% of its free cash flow to shareholder returns—far below the 75% to 100% range seen among peers—the company has room to deploy a higher proportion of free cash flow toward buybacks.'