Nvidia's valuation hits a ten-year low; Bank of America: AI demand is strong, stock price remains undervalued!
Bank of America expects Nvidia's second-quarter revenue to reach $94 billion to $95 billion, higher than the company's previous guidance of $91 billion, and forecasts third-quarter sales to reach $107 to $108 billion, far exceeding the market consensus of about $104 billion. Nvidia is scheduled to announce its earnings after the market closes on August 26, Eastern Time. Bank of America maintains a Buy rating for Nvidia with a $350 target price, listing it as the sector's top pick. Institutions specifically pointed out that the stock is highly attractive, with the current price-to-earnings ratio for 2027 expected earnings per share at only 16 times, the lowest forward P/E level in nearly a decade.
Recently, Wall Street has become increasingly cautious about two major pressure points: first, rising component costs eroding hardware profit margins; second, the potential risks posed by chip designers providing recyclable supplier financing to their customers. Bank of America's analysis refutes both of these points, stating that the memory cost pressure for the upcoming Vera Rubin system is only about 60 basis points, with limited impact. Additionally, Nvidia's direct equity commitments to partners account for only 15% of its projected $470 billion in free cash flow over the next two years, significantly easing market concerns about balance sheet risk.
The price of dynamic random-access memory (DRAM) continues to rise, becoming a hot topic in the semiconductor supply chain. Currently, memory costs account for 40% to 50% of total manufacturing costs, while historical levels have only been 15% to 20%. However, Bank of America believes Nvidia has a unique resilience due to its strong dynamic pricing capabilities, preferred sourcing relationships with suppliers like SK Hynix, and high prices for rack-level architecture products.
For NVL racks, the cost of high-bandwidth memory (HBM) and low-power double data rate memory (LPDDR) in Vera Rubin systems is estimated to account for 12.7% of the rack's total price, with margin pressure of only about 60 basis points compared to the existing Blackwell Ultra. Although the addition of LPDDR and storage NAND for full Pod-level system integration may dilute gross margins by up to 500 basis points, Bank of America expects that the initial share of shipments of such full-system Pods will remain small. Overall gross margin is expected to stabilize in the healthy range of 73% to 74% over time, compared to the current level of about 75%.
In response to investors' concerns about Nvidia's venture capital, Bank of America estimates that Nvidia has committed about $70 billion in direct equity investment to ecosystem partners, including $30 billion in OpenAI and up to $10 billion in Anthropic. Nvidia expects to generate a combined $469 billion in free cash flow over the two calendar years of 2026 and 2027, so the company still has ample room to fulfill its commitment to return 50% of free cash flow to shareholders.
Market Insight:
Currently, GPU spot rental prices hover near historical highs, with B200 chip hourly rental prices reaching as high as $5.66. Bank of America expects Nvidia to maintain a dominant share of 65% to 70% of the AI accelerator market through 2030, and forecasts its annual earnings per share to exceed $25 by the 2030 calendar year.
