Investors may be forgetting that Nvidia (NVDA) is the dominant player in the AI chip game — at least through the lens of the valuation on the chip king's stock. The call: Nvidia shares are trading at a roughly 40%-50% discount to AI compute peers on an enterprise value-to-free cash flow basis, according to new research from Bank of America analyst Vivek Arya. What's more, the stock is trading at a 31% to 36% discount to the S&P 500 (^GSPC).
The relative valuation discount on Nvidia is "overstating the risks" associated with investments in companies such as OpenAI (OPAI.PVT) and Anthropic (ANTH.PVT) and creating a "compelling opportunity," Arya said. Despite an 8% rally over the past month heading into Nvidia's Aug. 26 earnings report, shares of Nvidia are still 7% below their 52-week high. Nvidia's stock hit a 52-week high of $236.54 on May 14, per Yahoo Finance AlphaSpace data.
The bottom line: If there is any reason to proceed with caution ahead of Nvidia's earnings, 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, given the rising valuations (see Anthropic, for example) being afforded to most privately held names in AI. "We continue to expect a beat and raise," Stifel analyst Ruben Roy wrote in a note on Wednesday.
"Earnings season has consistently reinforced the demand case that we made in our broader coverage preview as CSP capex was raised meaningfully, Foxconn's cloud and networking segment crossed 50% of revenue for the first time with full-year AI rack shipments guided to more than double, and Super Micro booked over $60 billion of new orders in a single quarter." "We think that the other primary debates, memory cost and inference competition are likely to be expressed in gross margin rather than demand and, we believe, are partly reflected in the multiple," Roy added. Brian Sozzi is Yahoo Finance's Executive Editor, host of the 'Power Players With Brian Sozzi' podcast and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn.
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