BofA says Nvidia's 18x P/E is a buying opportunity with 72% upside

Nvidia Corp. trades at 18 times forward earnings, a seven-year low that Bank of America says creates a buying opportunity with 72% upside.

"The market is pricing in an unjustified 30% to 35% headwind to 2027 and 2028 earnings estimates," Vivek Arya, analyst at Bank of America, said in a note Wednesday. "We strongly disagree with that assessment."

Arya maintained his Buy rating and $350 price target on Nvidia. The stock closed at $204.14, up 3.7% on the day. Nvidia has gained about 3% year-to-date, trailing the Philadelphia Semiconductor Index's 82% rally. The analyst identified four investor concerns weighing on the shares: gross margin pressure from higher memory costs, custom ASIC competition, concentrated institutional ownership and capital deployment through vendor financing. He said all four are overstated.

Nvidia's pricing power offsets higher memory costs, Arya said. While high-bandwidth memory content per rack may rise $200,000 to $300,000 in the transition from Blackwell to Rubin platforms, rack pricing could increase $2 million to $3 million. The company has $119 billion in supply-chain commitments. Arya projects gross margins will remain in the mid-70% range.

On ASIC competition, Arya pointed out that Google's TPU, Amazon's Trainium and Meta's MTIA have all existed for years, yet Nvidia's GPU accelerator revenue has grown about 700 times since 2015. Sales to hyperscalers rose 115% year-over-year, nearly double the pace of cloud capital expenditure growth.

Nvidia's valuation of 18 times forward earnings represents a 30% to 35% discount to large-cap technology peers including Apple Inc., Microsoft Corp., Amazon.com Inc., Meta Platforms Inc. and Alphabet Inc., which trade at an average of 22 times 2027 estimates and 19 times 2028 estimates, according to BofA.

Among 37 analysts covering Nvidia, 36 rate it a Buy and one rates it a Hold, with a consensus price target of $309.93, implying about 57% upside.

The call from one of Wall Street's top-rated analysts signals that Nvidia's recent underperformance may be nearing an end. Investors will watch the company's upcoming earnings report for confirmation of pricing power and demand trends.

This article is for informational purposes only and does not constitute investment advice.