Nvidia Corp.’s NVDA has enraptured investors with a strategic trajectory fueled by robust free cash flow (FCF) and an evolving approach to recurring revenue. The company is poised for substantial growth and market revaluation. As of 2023, the stock has outpaced its peers, returning a staggering 245%.

Analyst’s Endorsement: BofA Securities analyst Vivek Arya has kept the faith in Nvidia, maintaining a Buy rating on the stock with a price target of $700.

The Bright Outlook: According to Arya, Nvidia’s allure as an investment opportunity shines ever brighter, with an anticipated $100 billion in FCF expected to materialize over CY24/CY25E. Nvidia plans to leverage this significant cash flow to propel innovative growth initiatives.

The key to unlocking Nvidia’s true potential lies in a shift towards a more recurring revenue-oriented profile. While the company leads the pack in AI, its reliance on hardware-centric operations has dampened its valuation. The pursuit of acquisitions or partnerships to fortify recurring revenue sources is paramount, as evidenced by the attempted acquisition of Arm Holdings.

Nvidia’s remarkable success with the Mellanox acquisition, which led to a fivefold increase in annualized revenue to $10 billion, demonstrates its acumen in strategic investments. Expanding into storage to complement its computing and networking strengths could position it as a comprehensive AI systems vendor.

While Nvidia may not set its sights on becoming a specialized AI cloud service provider due to intense competition, it remains committed to alternative GPU-focused CSP to broaden its reach.

At present, Nvidia generates only a modest percentage of revenue from software/subscriptions. However, strategic additions to its AI enterprise suite through mergers and acquisitions or enhanced partnerships could significantly bolster recurring revenue in 2024.

Anticipated catalysts, such as the Consumer Electronics Show (CES) and the GPU Technology Conference (GTC), hold the promise of propelling stock movement. This could potentially break Nvidia out of its recent trading range. Despite being among the largest U.S. stocks, Nvidia trades at a discount compared to its peers on various metrics, presenting an attractive investment opportunity.

NVDA Price Action: Nvidia stock was up 2.25% at $490.80 on Friday at the time of publication.