• Bank of America argues Nvidia may be trading at a 34%-50% discount, as investors overstate AI-related risks.
  • The bank maintains a Buy rating and a $350 price target, implying significant upside from the current price around $219.
  • BofA sees Nvidia's aggressive AI investments as a long-term opportunity, despite potential balance-sheet risks if demand slows.

A Deep Discount?

Nvidia Corp. shares may be significantly undervalued, according to Bank of America, which argues that investors are overestimating the risks associated with the AI boom. In a note released Thursday, BofA analysts led by Vivek Arya said the chipmaker could be trading at a 34%-50% discount to its intrinsic value, as concerns about overbuilding in data centers and increased competition from custom accelerators have weighed on the stock.

"We believe the market is overstating the potential risks to Nvidia's growth trajectory," Arya wrote. "AI demand remains robust, and Nvidia's investments in accelerated computing and software platforms position it well for the long term."

The bank reiterated its Buy rating and a $350 price target, implying a potential upside of nearly 59% from Nvidia's current trading level around $219. The stock has fluctuated in recent months despite record revenue and earnings, as investors grapple with questions about the sustainability of AI spending.

AI Investments: Risk and Reward

BofA acknowledges that Nvidia's aggressive investments in AI infrastructure could strain its balance sheet if demand were to slow unexpectedly. However, the bank argues that these investments are necessary to maintain Nvidia's leadership in the rapidly evolving AI market. The company has been expanding its product lineup beyond GPUs, including networking solutions and software platforms like CUDA, which are designed to deepen customer loyalty and create high switching costs.

"Nvidia's ecosystem is a competitive moat," Arya said. "Even if some customers choose to develop their own chips, they will still rely on Nvidia's software stack and integration capabilities."

The bank's view contrasts with some bearish analysts who have warned that hyperscale cloud providers could start designing their own silicon, eroding Nvidia's market share. However, BofA downplays this threat, noting that the pace of innovation at Nvidia and the scale of its research and development spending make it difficult for rivals to catch up.

Market Context

The bullish call comes as Nvidia's stock has faced headwinds despite a stellar earnings season. In the latest quarter, the company reported a 122% year-over-year increase in data center revenue, fueled by demand for its H100 and upcoming Blackwell architecture. Yet, shares have struggled to hold gains, reflecting investor anxiety about the cyclicality of the semiconductor industry and the potential for a pause in AI capital expenditures.

"The market is focused on the near-term risks, but we see the long-term opportunity as still intact," Arya added. "The AI infrastructure buildout is still in its early innings, and Nvidia is the primary beneficiary."

Implications

If BofA's valuation assessment is accurate, Nvidia could be a compelling buy for investors willing to weather short-term volatility. The stock's current price-to-earnings ratio of around 54 times forward earnings is below its historical average of 70, suggesting that expectations have been reset. With a target price that implies substantial upside, the bank's confidence could spur renewed interest from institutional investors.

For now, Nvidia remains the dominant player in AI computing, with a market share exceeding 80% in data center GPUs. The company's ability to sustain that dominance will likely determine whether it can achieve the valuation appreciation BofA envisions. As always, investors should consider their own risk tolerance and investment horizon when evaluating such high-growth opportunities.

This article was written with the assistance of automation and reviewed by an editor.