Nvidia Is Analyst's Top Sector Pick With Potential $100B FCF For Growth Initiatives Such As AI

Nvidia Corp.’s NVDA strategic trajectory, fueled by robust free cash flow (FCF) and an evolving approach to recurring revenue, positioned it for substantial growth and market revaluation in the foreseeable future. The stock is a top performer amid the “Magnificient 7,” returning 245% in 2023.

The Nvidia Analyst: BofA Securities analyst Vivek Arya maintained a Buy rating on Nvidia stock with a price target of $700.

The Nvidia Thesis: Per Arya, Nvidia emerged as a compelling investment opportunity amidst its promising prospects for the coming years. Arya forecasted $100 billion in FCF anticipated to materialize over CY24/CY25E. Nvidia stands poised to utilize this significant FCF generation to drive innovative growth initiatives.

The key lies in shifting towards a more recurring revenue-oriented profile. While Nvidia leads in AI, its reliance on hardware-centric operations affects its valuation. The pursuit of acquisitions or partnerships to strengthen recurring revenue sources remains pivotal. The past bid for Arm Holdings exemplified Nvidia’s intent for software/IP assets.

Nvidia’s Mellanox acquisition success, quintupling annualized revenue towards $10 billion, showcased its prowess in strategic investments. Expanding into storage to complement its compute and networking strengths could be a strategic move toward a comprehensive AI systems vendor role.

While Nvidia may not venture into becoming a specialized AI cloud service provider due to the hyper-competitive landscape, it remains invested in alternative GPU-focused CSP to broaden its reach.

Currently generating only a modest percentage of revenue from software/subscriptions, strategic additions to its AI enterprise suite through M&A or enhanced partnerships could significantly augment recurring revenue in 2024.

Anticipated catalysts, such as the CES and GTC tradeshows, hold the potential to catalyze stock movement, potentially breaking Nvidia out of its recent trading range.

Despite being among the largest U.S. stocks, Nvidia trades at a discount on various metrics compared to its peers, presenting an enticing investment opportunity.

NVDA Price Action: Nvidia stock was up 2.25% at $490.80 on Friday at the time of publication.

Now Read: Nvidia Enjoyed AI Hype, But Now It’s Approaching ‘Trough Of Disillusion’: Analyst

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