In case you haven't heard it yet: Nvidia Corporation (NASDASQ:NVDA) had a really good 2023. From January to December, the semiconductor company's share price more than tripled. And at $491 at Friday's close, Nvidia shares remain within 3% of their all-time high of $505.48.
Note: It could be even higher.
That's according to Bank of America analyst Vivek Arya, who released his latest buy rating on Nvidia stock on Thursday, predicting that Nvidia will rise another 40% to reach $700 per share by the end of this year. (To view Arya's track record, click here)
And why does Arya think that? That's why free cash flow is $100 billion. According to Arya, Nvidia stock, worth nearly $1.2 trillion today, is on track to generate as much as $100 billion in positive cash earnings over the next two years.
That's a pretty amazing claim when you think about it. According to the consensus of about 40 Wall Street analysts who follow Nvidia, the company is expected to generate “only” $70 billion from 2024 to 2025 – an impressive sum in itself, but 30% less money than Arya thinks it's possible.
What's also pretty surprising is the fact that Arya doesn't give much detail about his reasoning, why he thinks everyone else is wrong about Nvidia, and why he's right about the $100 billion figure – and how he responds comes. On the contrary, Arya lays out his claim: “Nvidia’s “GenAI dominance… can potentially help generate additional free cash flow of approx.
Of course, that doesn't mean Arya is necessarily wrong. We will definitely want to review this again in 12 months. But the lack of support for this FCF estimate should perhaps give investors pause – as it is the underlying assumption on which Arya builds the rest of his buy thesis.
And what theory is that exactly? According to the analyst, Nvidia will take the $100 billion the company expects to earn over the next two years and use $30 billion to $35 billion of it to buy back shares, which will boost earnings per share and Nvidia The projected earnings per share growth rates are 67% in 2024 and 26% in 2025. Nvidia will then use the remaining $65 billion to $70 billion for “organic and inorganic growth initiatives,” reinvestment in the company and the Use purchasing other companies to accelerate revenue growth – and accelerate EPS growth even further.
Arya specifically wants Nvidia to get into more software and services businesses that can generate “more meaningful recurring revenue,” the lack of which Arya sees as a weakness for the stock. The analyst acknowledges that it's more likely that Nvidia will expand further into hardware instead, but points out that the company has invested in some of its own cloud service provider customers (like CoreWeave, Lambda Labs, Vultr and others ). If Nvidia makes more of these equity-oriented investments, the company may participate in recurring revenue growth even as it increases sales of its own hardware products to its customers, thereby increasing revenue and profits, in the coming years.
Assuming that the $100 billion FCF number isn't just an analyst's pipe dream.
Overall, NVDA shares have a unanimous “Strong Buy” analyst consensus rating, a sign of confidence from Wall Street analysts. At $660.77, the average price target implies growth of around 35% in the coming year. (See NVDA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is for informational purposes only. It is very important to do your own analysis before investing.