Key highlights:
- Bank of America is still predicting a 78% upside for Nvidia shares
- The stock is currently trading at about 18x forward earnings, its lowest valuation in seven years
- BofA said the market is underestimating the company’s pricing power
The potential end of the AI boom has been a major talking point in the market recently. Investors like Michael Burry have been making claims that the AI rally is coming to an end.
Bank of America has come out to say these concerns are a new buying opportunity for investors. The bank reiterated its Buy rating and maintained a $350 price target on Nvidia. They said that the company’s current valuation does not tell the full story of its growth potential in the long term.
Nvidia valuation reaches a multi-year low
Interestingly, one of the biggest reasons Bank of America is bullish is the stock’s low valuation. The firm noted that the chipmaker is trading at around 18 times forward earnings, which is the lowest level seen in almost seven years. For the bank’s analysts, that is surprisingly cheap for a company benefiting from the AI boom.
Bank of America shared that investors are dwelling too much on potential risks. BofA analyst Vivek Arya shared that the market is pricing in a 30% to 35% hit to earnings estimates for 2027 and 2028. He said that this assumption is totally off if based on Nvidia’s business performance.
The bank also pointed to the company’s PEG ratio to make its point. Based on 2027 estimates, the stock trades at a PEG ratio of only 0.3. When comparing with other companies like Apple, which stands at 2.7, Microsoft at 1.0, and Alphabet at 1.9. This suggests that investors may be undervaluing its growth in the coming years.
BofA also expects cloud and AI spending to grow to around $1.5 trillion. This would mean an annual growth of 40% to 50%. The demand for AI agents and the growing token usage are expected to be catalysts for that growth.
Additionally, Nvidia introduced a new revenue-sharing model for cloud providers. This will allow AI cloud companies to offer computing services while sharing part of the revenue raised. It would also create an additional source of income for the firm.
Bank of America analysts see strong pricing power
Another part of the bank’s bullish view is the company’s pricing power. Many investors fear that the growing high-bandwidth memory (HBM) costs could hurt profit margins. But Bank of America said that the market is overlooking the additional revenue Nvidia’s newer systems could generate.
According to the firm’s estimates, memory costs for future AI server racks could increase by $200,000 to $300,000. Also, overall rack pricing could potentially increase from around $3 million-$4 million today to as much as $6 million-$7 million.
The bank also pointed to over $119 billion in supply-chain commitments. This could help boost its competitive position and support gross margins in the mid-70% range.
Competition concerns may be overblown
The bank also addressed competition concerns from Google, Amazon, and Meta. In their view, Nvidia GPU accelerator sales have grown by 700x since Google’s TPU chips launched in 2015.
The company’s sales to hyperscale customers also climbed 115% year over year, which is 2x the growth rate of its cloud spending. Based on those trends, the bank said it expects the company to maintain between 65% and 70% of AI computing spending over the long term.
The stock has gained only about 3% this year, which is way behind the Philadelphia Semiconductor Index’s 82% rise. Analysts at the bank see this underperformance as a buying opportunity.
Source:: Bank of America Backs Nvidia Stock With $350 Target as Forward Multiple Hits 7-Year Low