(Bloomberg) -- Nvidia Corp. shares could be trading at a discount of as much as 50%, as investors overstate risks related to the leader in artificial intelligence chips, according to Bank of America.
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The bank's conceptual sum-of-parts analysis on Nvidia's free cash flow shows that the stock trades at a 34% to 50% discount, even after considering financing risks, writes analyst Vivek Arya.
The discount "could be overstating the risks and creating a compelling opportunity," the analyst highlighted.
Shares of Nvidia fell 2.5% to $219 on Tuesday, participating in a widespread decline of AI-related stocks. Nvidia is up about 18% so far this year, though it remains around 7% below a May peak.
The comments come as Nvidia invests across the AI ecosystem. It recently agreed to spend as much as $105 billion to support an Ohio data center campus that is set to be leased by OpenAI, and disclosed sizable stakes in both SpaceX and Intel Corp.
In fact, BofA estimates that Nvidia has committed to provide around $300 billion of capital for its ecosystem partners, roughly split between $70 billion of equity investments and $230 billion of residual value guarantees or backstops.
"The strategic intent is clear: NVDA is committed to the transformational nature of AI and to securing every input," including chip supply, land and power, Arya wrote. The moves also help Nvidia diversify beyond public hyperscalers building competitive custom chips, he noted.
The strategy carries both risks and rewards.
"Today's conditions make this worthwhile: solid GPU rental rates, compute scarcity, and NVDA's industry-leading FCF generation," Arya wrote. However, "if AI demand slows, both NVDA's growth rate and balance sheet could come under pressure."
BofA also emphasizes that the "most forceful counter" to ease worries over lower earnings quality and re-rate shares would be for the company to boost investor cash returns, by committing a greater share of its free cash flow to buybacks.
The firm has a buy rating and $350 price target on the stock.
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