Analysts at Melius predicted that Nvidia’s investments in businesses within its ecosystem will boost the company’s stock price.
Nvidia Corp.’s announcement last month of a $100 billion investment in the artificial intelligence startup OpenAI sparked criticism that the corporation was engaging in a sort of “circular” strategy by providing funds to businesses that would subsequently use them to purchase chips.
However, Melius Research analysts stated that they do not believe that Nvidia’s (NVDA) investments in its own ecosystem represent bubble behavior. Instead, the analysts pointed out that they might act as a catalyst for the stock.
In a note released on Wednesday, the Melius team predicted that over the following three and a half years, Nvidia’s free cash flow will surpass $600 billion. The analysts now believe Nvidia will find other ways to spend, allocating only 20% of the funds to share repurchases, whereas previously they believed the business would “have no choice but to announce the biggest buyback program ever” with all that cash.
Nvidia raised its stock-buyback program by $60 billion in August, setting a new record for the company. However, the action provoked discussion on Wall Street about whether a rapidly expanding business should be spending so much money on repurchases rather than more technology-focused uses of its funds.
However, Nvidia has demonstrated that it is also allocating funding to other goals. The analysts pointed out that CEO Jensen Huang “is going to use cash to invest in his ecosystem to help grease the AI flywheel.” They cited Nvidia’s $250 million investment in CoreWeave Inc.’s (CRWV) March IPO, which they said produced a return of almost 240%.
The Melius team retaliated against those who labeled Nvidia’s $100 billion investment in OpenAI “‘circular cash’ or bubble-like.'” According to the chip manufacturer, the investment will be made gradually as OpenAI expands its AI infrastructure by deploying each gigawatt of its systems, which contain millions of graphics processing units.
The analysts identified two actions that can be seen as bubble behavior: JPMorgan Chase & Co.’s (JPM) introduction of AI models to its staff and Walmart Inc.’s (WMT) usage of AI to optimize its supply chain.
“The desire to invest in AI to keep headcount flat is real,” the analysts stated, reinforcing their belief that traditional search engines and software-as-a-service applications are being replaced by AI tools like those from OpenAI.
The sector hasn’t “even seen the real spending on infrastructure for autonomous machinery and robots yet,” according to the Melius team, who also expressed optimism about Nvidia because the company “has been investing in its ecosystem for years.”
“So, if this ‘circular cash’ comes with ‘beats and raises’, the stock should go quite a bit higher,” according to the analysts.
Nvidia’s stock increased by 0.4% on Wednesday, bringing its year-to-date gain to about 35%.
