Is NVIDIA Stock Undervalued by 50%? Bank of America Says 'Buy,' Sets $350 Target

Although NVIDIA's (NVDA-US) aggressive expansion into the AI ecosystem carries financial risks, Bank of America believes the market may have overly discounted these concerns, creating room for a reassessment of NVIDIA's stock valuation.

In a recent report, Bank of America analyst Vivek Arya stated that even when factoring in financing risks, a sum-of-the-parts valuation model based on free cash flow suggests NVIDIA's current stock price could be trading at a 34% to 50% discount compared to its intrinsic value.

Arya believes the market may be "overestimating the associated risks," which instead creates an attractive buying opportunity. As a result, Bank of America maintains its 'Buy' rating on NVIDIA, setting a target price of $350.

NVIDIA's stock closed down 2.34% on Tuesday (18th) at $219.74, following a broader weakness in AI-related stocks. However, the company's shares have still gained approximately 18% year-to-date, with the current price about 7% below its May peak.

The release of Bank of America's report coincides with NVIDIA's ongoing expansion of capital deployment across the AI supply chain.

Recently, NVIDIA agreed to provide up to $105 billion in guarantees to support the construction of a data center campus in Ohio leased by OpenAI. Additionally, NVIDIA disclosed substantial equity stakes in SpaceX (SPCX-US) and Intel (INTC-US).

Bank of America estimates that NVIDIA has so far committed approximately $300 billion in capital to AI ecosystem partners, with around $70 billion allocated to equity investments and about $230 billion in residual value guarantees (RVG) or other backstop commitments.

Arya points out that there is a clear strategic rationale behind these investments: NVIDIA is betting on the industrial transformation driven by AI and attempting to secure key production inputs required for AI infrastructure, including chip supply, land, and power.

Moreover, by expanding its ecosystem, NVIDIA aims to strengthen its position in the AI computing market to counter competition from large public cloud providers developing their own custom AI chips.

Bank of America believes the current market environment remains favorable for NVIDIA to pursue this aggressive strategy. GPU rental prices remain strong, AI computing capacity remains relatively scarce, and NVIDIA possesses industry-leading free cash flow generation capabilities, enabling continued capital deployment.

However, this strategy also amplifies potential risks.

Arya warns that if AI demand begins to cool, not only could revenue and profit growth slow, but the balance sheet might also face greater pressure.

Meanwhile, the market has recently begun focusing on issues related to NVIDIA's earnings quality and capital allocation. In response, Bank of America believes one of the most effective ways to alleviate investor concerns and drive a re-rating is to increase cash returns to shareholders.

Arya notes that if NVIDIA commits to allocating a higher proportion of its free cash flow toward share buybacks, it would help ease market concerns about earnings quality and could become a significant catalyst for stock price revaluation.