The risk of AI ecosystem investment is exaggerated by the market! Bank of America backs Nvidia (NVDA.US) price target to $350

The Zhitong Finance App learned that the Bank of America believes that the market may have overestimated the risks posed by Nvidia (NVDA.US)'s large-scale investment around the artificial intelligence ecosystem, causing its stock price to be clearly discounted. The bank estimates that even after taking into account related financing risks, Nvidia's current valuation discount margin may still reach 34% to 50%, which means that the current stock price may have more potential to rise.

Bank of America analyst Vivek Arya pointed out through a conceptual segmented valuation analysis of Nvidia's free cash flow that the company's stock is currently discounted by about 34% to 50% compared to its potential value. He believes that this discount may mean that investors overprice the associated risks, thereby creating attractive investment opportunities.

Nvidia's stock price fell 2.5% to $219 on Tuesday, following the general decline in AI-related stocks. Since this year, Nvidia has accumulated a cumulative increase of about 18%, but it is still about 7% below the high set in May of this year.

Recently, Nvidia is making large-scale capital investments throughout the AI industry ecosystem. The company recently agreed to provide financial support of up to 105 billion US dollars for a data center campus to be leased by OpenAI in Ohio, USA, and also disclosed large holdings in SpaceX (SPCX.US) and Intel (INTC.US).

The Bank of America estimates that Nvidia has now promised to provide about 300 billion US dollars in capital support to AI ecosystem partners, of which about 70 billion US dollars are equity investments, while another 230 billion US dollars involves residual value guarantees or other forms of financial support.

Arya said that the intention of Nvidia's strategy is clear, that is, the company believes in the long-term transformative potential of AI and wants to secure critical AI infrastructure resources such as chip supply, land, and electricity. At the same time, large-scale investment in the AI ecosystem will also help Nvidia reduce its dependence on large cloud computing vendors. Currently, hyperscale cloud service providers such as Microsoft and Google are actively developing self-developed AI chips, which may put competitive pressure on Nvidia in the long run.

However, this strategy involves both risk and reward. Bank of America believes that in a context where GPU rental prices remain strong, AI computing power is still lacking, and Nvidia has industry-leading free cash flow generation capabilities, it is reasonable to make these investments now. However, if demand for AI slows significantly in the future, not only may Nvidia's revenue and profit growth be affected, but its balance sheet may also face greater pressure.

The bank also pointed out that one of the most powerful ways to ease market concerns about Nvidia's declining profit quality and large-scale ecological investment risks is to further increase shareholders' cash returns. The bank believes that if Nvidia promises to use a larger share of free cash flow for share repurchases, it may help push the market to re-evaluate the company's valuation level.

Bank of America currently maintains Nvidia's “buy” rating and gives a target price of $350. Compared to Tuesday's closing price of $219, this means potential upside is close to 60%.