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Nvidia’s Bright Horizon: Predicted 42% Growth and $100 Billion Cash Flow Revolutionize AI Chip Market

Nvidia’s stock, which witnessed a significant surge last year, is poised for even greater heights in 2024. This optimism stems from the company’s robust progress in the AI chip sector, as highlighted in a recent Bank of America analysis. The bank forecasts that Nvidia’s rapidly expanding revenue and profit margins will enable it to amass an astounding $100 billion in free cash flow over the next two years. To put this into perspective, Nvidia’s free cash flow in the past two years was under $30 billion.

Vivek Arya from Bank of America, in his discussion with CNBC, described this projection as “the cherry on top of a very delicious cake.” This cake consists of several layers of potential: the nascent phase of generative AI, Nvidia’s dominant market position, and a pipeline brimming with innovative AI chips. “These cycles don’t just start and end in one year. These can be decade-long cycles, and we are just in year two,” Arya explained.

This expected influx of cash will not only bolster Nvidia’s financial standing but also propel its growth initiatives, significantly enhancing its market value. Arya’s analysis suggests that while approximately $30 to $35 billion could be funneled into buybacks, a substantial amount — between $65 to $70 billion — remains available for fresh organic and inorganic growth ventures.

A key factor in Nvidia’s continued market success and valuation increase will be its transition towards a recurring revenue model. Presently, its heavy reliance on hardware sales is why it trades at a price-to-earnings ratio of only 20x based on 2025 estimates, notably lower than its tech mega-cap counterparts and its historical average of 35x to 40x.

Nvidia, despite being part of the ‘Magnificent 7’, trades at a 20% to 30% discount on both price-to-earnings and enterprise value-to-free cash flow bases. This is despite having double the free cash flow margins and triple the sales CAGR compared to its peers. “We expect Nvidia to consider assets that help it create a more meaningful recurring revenue profile,” Arya stated, acknowledging that hardware-focused businesses often don’t garner high valuations due to limited visibility.

Nvidia’s ambitious attempt in 2020 to acquire Arm Holdings for $40 billion, although unsuccessful, is indicative of its aggressive strategy in expanding its software and intellectual property assets. Currently, software and subscription services contribute about $1 billion or 2% to Nvidia’s sales, a figure Arya suspects could reach a maximum of $5 billion without additional inorganic additions to its AI enterprise suite.

Looking ahead, key events like the upcoming CES and GTC tradeshows could provide Nvidia with platforms to announce significant product updates, potentially pushing its stock beyond the $400 to $500 trading range. Arya maintains a “Buy” rating on Nvidia with a $700 price target, signaling a potential 42% increase from current levels.