Nvidia Stock Trading at 34-50% Discount: Bank of America

Nvidia's latest deal with OpenAI has raised concerns on Wall Street about the company's growing role as an AI financier. However, Bank of America analyst Vivek Arya believes investors are overreacting and that Nvidia stock is trading at a discount.

Arya points out that Nvidia guaranteed up to $105 billion in leases for an OpenAI data center in Ohio, but this does not mean it will cover the full rent. Instead, it will only cover any leftover gap if OpenAI defaults on payments and the site needs to be re-leased or sold.

Arya values Nvidia piece by piece on its free cash flow and believes that even after loading in every financing risk, the shares are trading 34% to 50% below fair value. He notes that Nvidia's ecosystem investments, including those into smaller cloud firms built to rent out graphics processing units (GPUs), are critical to accelerating the AI cycle.

Arya recommends that Nvidia put more of its free cash flow into buybacks, which would ease doubts about earnings quality and potentially lift the stock price. With Nvidia's earnings set to be released on August 26, Arya expects the company to detail its off-balance-sheet commitments, which could help alleviate concerns and start to close the discount.