Here's what Nvidia needs to do to unlock an even better stock valuation

Nvidia Corp. needs a new narrative beyond earnings and product roadmaps to unlock a higher stock valuation, according to HSBC analyst Frank Lee, who said the company's push into open-source AI and small language models could drive the next rerating. Nvidia has also partnered with Apollo Global Management, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR to deploy $500 billion in private capital for AI data centers, and agreed to provide up to $105 billion in credit support for SB Energy's 8-gigawatt PORTS Technology Campus in Ohio, which will be leased by OpenAI and run on Nvidia AI infrastructure.

If there is any reason to proceed with caution ahead of Nvidia's NVDA https://finance.yahoo.com/quote/NVDA/ earnings on Aug. 26, it's that the market is positioned for the company to post something great and for CEO Jensen Huang to sound super bullish on the earnings call. They also know there is minimal downside risk to Nvidia's growing investment portfolio https://finance.yahoo.com/markets/stocks/article/nvidias-70-billion-bet-on-openai-anthropic-and-others-could-pay-off-big-for-shareholders-150039868.html , given the rising valuations see Anthropic ANTH.PVT https://finance.yahoo.com/quote/ANTH.PVT/ , for example being afforded to most privately held names in artificial intelligence. Factor in Nvidia's stock outperforming the S&P 500 ^GSPC https://finance.yahoo.com/quote/^GSPC/ by five percentage points over the past month, per Yahoo Finance AlphaSpace https://finance.yahoo.com/about/promos/gold/alphaspace?100003557 data, and it suffices to say expectations are running hot into earnings. So a rerating in the chip king's stock — where an even better valuation could be unlocked due to increased investor interest — won't be easy. It can be done, though, HSBC analyst Frank Lee wrote in a new note on Friday. "The next major re-rating for Nvidia will be driven by a new narrative as earnings and the product roadmap have become less meaningful narratives for re-rating," Lee said. Lee contended that new narrative could be the company's "positioning itself as the world's largest contributor to open-source AI." "According to Nvidia, the aggregate of open-source models now represents the second most popular category by token generation," Lee said. "This is critical as open-source small language models SLMs are emerging as the preferred engine for agentic AI and on-device applications." "A boost in small language models presents significant earnings upside by lowering the barrier to entry for enterprise inference, expanding the total addressable market TAM for Nvidia's infrastructure beyond just a few frontier labs to millions of individual developers and sovereign nations," he added. Nvidia has taken other steps of late to arguably rerate its stock. Earlier this month, Nvidia partnered with financial powerhouses — including Apollo Global Management APO https://finance.yahoo.com/quote/APO/ , BlackRock BLK https://finance.yahoo.com/quote/BLK/ , Blackstone BX https://finance.yahoo.com/quote/BX/ , Brookfield BN https://finance.yahoo.com/quote/BN/ , Goldman Sachs GS https://finance.yahoo.com/quote/GS/ , and KKR KKR https://finance.yahoo.com/quote/KKR/ to establish independent compute financing platforms. Disclosure: Yahoo is a portfolio company of funds managed by affiliates of Apollo Global Management. The consortium is looking to deploy $500 billion in private capital to fund AI data centers and "AI factories," transforming Nvidia hardware into an investable asset class for institutional capital. Huang quickly followed this up with a deal to provide up to $105 billion in credit support and residual value guarantees for SB Energy's 8-gigawatt PORTS Technology Campus in Pike County, Ohio. The massive facility will be leased by OpenAI OPAI.PVT https://finance.yahoo.com/quote/OPAI.PVT/ and will run exclusively on Nvidia AI infrastructure.