Nvidia, the renowned chip maker, has the potential to unlock an additional $100 billion in cash by focusing on expanding its recurring revenue streams, according to an analysis by BofA Securities analyst Vivek Arya. By developing longer-term software contracts similar to companies like Salesforce, Workday, and ServiceNow, Nvidia could mitigate the impact of boom-and-bust cycles it has endured in recent years.
Arya believes that by moving away from its hardware-oriented business and generating more recurring revenue, Nvidia could see an incremental free cash flow of $100 billion over the next two years. Currently, the company only generates about 2% of its sales from software and subscriptions, amounting to approximately $1 billion. Arya suggests that unless Nvidia turns to acquisitions, it is unlikely to exceed $5 billion with its software and subscription offerings.
To address these challenges, Nvidia has shown a willingness to pursue deals that would enhance its intellectual property and software offerings, as exemplified by its attempted acquisition of British chip designer Arm Holdings. Arya suggests that Nvidia could further bolster its software capabilities by partnering with or acquiring software companies that cater to traditional enterprise customers deploying generative artificial intelligence applications.
The addition of more recurring revenue streams could help to improve Nvidia’s trading multiple, which currently lags behind its peers by 20% to 30%. Despite Nvidia’s impressive compound annual growth rate, uncertainties surrounding its growth prospects in 2025 and its heavy reliance on hardware have contributed to the discount in its valuation compared to other large-cap software and internet peers.
Taking into account these factors, Arya maintains a buy rating on Nvidia’s stock with a price objective of $700.
In conclusion, by venturing into longer-term software contracts and expanding its recurring revenue streams, Nvidia could tap into an additional $100 billion in cash over the next two years. This shift would not only address the limitations of its hardware-oriented business but also bolster its trading multiple and potentially align it more closely with the valuation of its software-focused peers.
Disclaimer: This article is not an investment recommendation. The information provided here is solely for informational purposes. Please do your own research before making any investment decisions.
