Nvidia Corp. has been highly successful in generating significant cash flow, but according to BofA Securities analyst Vivek Arya, the chip maker could potentially add another $100 billion to its pile of cash by adopting a strategy similar to Salesforce Inc.
To achieve this, Arya suggests that Nvidia should focus on developing businesses that offer recurring revenue. By expanding its software contracts and implementing longer-term subscription models like those of Salesforce CRM, Workday Inc., and ServiceNow Inc., Nvidia could better weather any boom-and-bust cycles it might face in the future.
Arya believes that if Nvidia capitalizes on these recurring-revenue opportunities, it could generate an additional $100 billion in free cash flow over the next two years.
Despite being a leader in AI, Nvidia’s hardware-centric nature has limited its valuation. Currently, only 2% of its sales come from software and subscriptions, amounting to approximately $1 billion. Arya suggests that without acquisitions, it may be difficult for Nvidia to substantially increase its software and subscription revenue beyond $5 billion.
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NVIDIA Explores Enhanced Partnerships and M&A Opportunities to Expand Software Offerings
Nvidia, the renowned technology company, has showcased its willingness to pursue partnerships and acquisitions that would bolster its intellectual property and software offerings. The company had previously attempted to acquire British chip designer Arm Holdings but faced opposition from regulatory bodies.
According to industry analyst Arya, Nvidia may seek enhanced partnerships or engage in mergers and acquisitions with software companies that facilitate the deployment, monitoring, and analysis of generative AI applications for traditional enterprise customers. While Nvidia already serves these customers through on-premise hardware and its DGX cloud service, Arya believes a more direct recurring software/service channel could have a more significant impact.
By incorporating additional recurring-revenue streams, Nvidia aims to improve its current trading multiple, which Arya considers to be “relatively depressed.” Nvidia’s shares currently trade at a 20% to 30% discount compared to its peers in what Arya refers to as the “Magnificent Seven.” This discount is evident in terms of price-to-earnings ratio as well as enterprise value to free cash flow. However, Nvidia’s compound annual growth rate on the top line is three times higher than that of other leading tech giants.
Arya attributes this discount partly to uncertainties surrounding the company’s growth prospects by calendar year 2025 and partly to its heavily hardware-dependent business model. In contrast, other large-cap software/internet peers boast recurring-revenue profiles.
Having analyzed Nvidia’s potential for growth, Arya has assigned a buy rating to the company’s stocks and established a price objective of $700.
