NVIDIA's AI Semiconductors to Generate Massive Profits

Analyst Vivek Arya from BofA Global Research predicts that Nvidia, the chip maker, will see substantial profits from selling its artificial intelligence semiconductors in the upcoming years. Arya has reiterated his "Top Pick" Buy rating for Nvidia stock and anticipates that the company will generate $100 billion in free cash flow within the next two years. He maintains a price target of $700 for the shares.

Nvidia stock experienced a 2.4% increase on Friday, reaching $491.29. Meanwhile, the S&P 500 and Nasdaq Composite saw relatively minimal gains of 0.1% and 0.2%, respectively.

The solid free cash flow generated by Nvidia allows for various options, according to Arya. He expects Nvidia to explore assets that can help establish a more significant recurring revenue profile. Due to the $100 billion free cash flow, Arya estimates that $30 billion to $35 billion can be allocated for stock buybacks. In the previous quarter alone, Nvidia repurchased $3.8 billion worth of its stock.

The remaining funds present an opportunity for the chip maker to invest in new revenue-generating prospects. Arya suggests that such investments can propel Nvidia's price-to-earnings valuation multiple back to its historical median average of 35-40 times, as opposed to the current 24 times.

As part of this strategy, Nvidia may consider enhanced partnerships or mergers and acquisitions of software companies that specialize in deploying, monitoring, and analyzing genAI applications for traditional enterprise customers.

Nvidia currently holds considerable dominance in the AI chip market, with both startups and corporations favoring its products. The company's robust programming platform, CUDA, offers AI-related tools that simplify the development of AI projects.