In case you haven’t heard, Nvidia Corporation (NASDASQ:NVDA) had a really good year in 2023. From January to December, the semiconductor company’s stock price more than tripled. And at $491 as of Friday’s close, Nvidia stock remains within 3% of it’s all time high share price of $505.48.
Hint: It could even higher than that.
This is according to Bank of America analyst Vivek Arya, who on Thursday published his latest buy recommendation on Nvidia stock, predicting that by the end of this year, Nvidia will rise another 40% and reach $700 a share. (To watch Arya’s track record, click here)
And why does Arya think that? $100 billion in free cash flow, that’s why. According to Arya, Nvidia stock that is worth just shy of $1.2 trillion today is on track to generate an even $100 billion in positive cash profits over the next two years.
This is a pretty astounding claim, when you think of it. According to the consensus of 40-odd Wall Street analysts who follow Nvidia, the company is expected to generate “only” $70 billion from 2024 and 2025 – an impressive sum in and of itself, but 30% less money than what Arya thinks is possible.
Also pretty astounding is the fact that Arya doesn’t give a whole lot of detail on his reasoning for why he thinks everyone else is wrong about Nvidia, and why he is right about the $100 billion number – and how he comes by it. To the contrary, Arya lays out his assertion: Nvidia’s “genAI dominance… can potentially help generate ~ $100bn of incremental free cash flow over the next two years” as more or less a bald faced assertion with no supporting math to back it up.
This doesn’t mean Arya is wrong necessarily, of course. We’ll certainly want to check back on that in 12 months’ time. But the lack of substantiation of this FCF estimate should perhaps give investors pause – seeing as it’s the underlying assumption upon which Arya builds the rest of his buy thesis.
And what thesis is this, exactly? According to the analyst, Nvidia is going to take the $100 billion that it will presumably make over the next two years, and use $30 billion to $35 billion of it to buy back stock, boosting per-share earnings and making it easier for Nvidia to achieve predicted earnings-per-share growth rates of 67% in 2024, and 26% in 2025. Nvidia will then deploy the remaining $65 billion to $70 billion on “organic and inorganic growth initiatives,” reinvesting in the business, and buying other businesses, to accelerate revenue growth – and accelerating EPS growth even further.
Arya particularly wants to see Nvidia enter into more software and services businesses that can generate “more meaningful recurring revenue,” the lack of which Arya sees as a weakness in the stock. The analyst admits it’s more likely Nvidia will continue to expand in hardware instead, but notes the company has been investing in some of its own cloud service provider customers (such as CoreWeave, Lambda Labs, Vultr and others). Making more of these participation-oriented investments could be the way Nvidia ends up participating in recurring revenue growth, even as it boosts sales of its own hardware products to its customers, growing sales, and earnings, in the years ahead.
Assuming, that is, that the $100 billion FCF number isn’t a complete figment of the analyst’s imagination.
Overall, NVDA shares have a unanimous Strong Buy analyst consensus rating, a show of confidence by Wall Street’s analyst corps. At $660.77, the average price target implies ~35% growth in the year ahead. (See NVDA stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
