Nvidia Stock Offers Compelling Valuation with AI Demand in Infancy, Says Bank of America
Nvidia, the renowned chip company led by CEO Jensen Huang, has been experiencing a remarkable surge in its stock value this year. Despite the significant growth, Bank of America believes that Nvidia stock still presents a “compelling valuation” with AI demand in its early stages. The bank has increased its price target for Nvidia to $800 from $700, indicating a potential upside of 23% from its current levels. On Friday, Nvidia’s shares soared 5% to reach a new record high of $661.19.
Bank of America analyst Vivek Arya highlights that while it is still the early days for AI adoption, the results from top US cloud customers suggest a strong motivation for spending in the field of genAI. This week’s earnings reports from tech giants such as Meta Platforms, Microsoft, Amazon, and Alphabet have revealed their focus on AI spending as they strive to solidify their positions in this rapidly growing industry. This is excellent news for Nvidia, as the company develops and sells GPU chips that power most AI technologies.
Although the mega-cap tech giants are currently leading the way in AI spending, there are numerous other companies that are just beginning to explore and implement their AI strategies. This is expected to generate significant demand for Nvidia’s AI offerings in the coming years. Arya emphasizes that enterprise genAI adoption has yet to take off and become more substantial in CY25, and Nvidia stands to benefit from its widespread availability on public clouds, as well as its unique partnerships with ServiceNow, SAP, VMWare, Dell, HPE, and others.
Arya predicts that Nvidia will deliver a measured revenue beat in its upcoming earnings report, along with solid earnings growth. Looking ahead, he envisions Nvidia generating over $40 in earnings per share power. Despite being a large-cap tech stock, Nvidia is currently trading at a relatively low price-to-earnings ratio of 31x/25x CY24/25 PE, which is below its estimated 45% CY23-25 EPS CAGR. Arya believes that Nvidia has the potential to reach $40 in EPS power by CY27E, with an accelerator TAM (Total Addressable Market) of over $160 billion. If the TAM were to reach AMD’s ambitious estimate of $400 billion, Nvidia’s EPS power could potentially double to $80 per share.
Arya attributes Nvidia’s earnings power to its dominant position in the market. He estimates that the company will maintain a 90% share of the AI training market and over 50% share of the AI inference market. Additionally, Nvidia’s diverse range of SKUs, spanning from approximately $1.2k to over $30k, ensures that it covers every segment of the compute market.
In conclusion, Bank of America’s analysis suggests that Nvidia stock continues to offer a compelling valuation, particularly considering the early stage of AI demand. With its strong presence in the market and partnerships with key players, Nvidia is well-positioned to capitalize on the growing adoption of AI technology. Investors can potentially benefit from the projected upside in Nvidia’s stock value as the company continues to thrive in the AI industry.