BofA maintains Buy on NVIDIA: improving cash returns could become a catalyst for valuation rerating

Overview

This is a company research report by Bank of America on NVIDIA Corporation. The core view is that, after ecosystem investments are largely complete, NVDA can shift more of its capital allocation focus toward shareholder returns. By increasing dividends and buybacks, it can expand holdings by dividend/income-oriented funds, reduce market concerns over large M&A and supplier financing noise, and provide a catalyst for valuation rerating.

Core views

The report maintains a Buy rating on NVDA and names it as a top industry pick, with a target price of 300.00 USD. The analysts believe NVDA has strong free cash flow generation capability, with combined CY26-CY27 FCF potentially exceeding $400 billion, yet its current valuation still trades at a discount relative to the Mag-7. If the company improves cash returns, it could signal to the market the sustainability of its growth and cash flow, while also broadening a more stable shareholder base. At the same time, the report acknowledges that the valuation discount is not solely due to insufficient cash returns, but is also affected by excessive index weight and intensifying AI chip competition.

Analysis framework

The report uses a framework of relative valuation, free cash flow returns, shareholder composition, and peer comparison, comparing NVDA with Apple, Microsoft, and other large technology companies, with a focus on P/E, EV/FCF, PEG, FCF scale, dividend yield, holdings by income-oriented funds, and historical capital return ratios.

Methodology notes

• Valuation comparisonPeer comparison of P/E, EV/FCF, and PEG

  Compare NVDA's earnings multiples, free cash flow multiples, and PEG against the Mag-7 and large-cap technology peers.

  The report notes that NVDA CY26/27E P/E is about 26x/19x, below the Mag-7 average of about 49x/42x; EV/FCF is about 28x/20x, also below the peer average, indicating a valuation discount.

• Cash flow returnsFCF returns

  Dividends plus buybacks divided by free cash flow.

  The report uses this metric to measure the proportion of free cash flow returned to shareholders. NVDA averaged about 47% over the past three years, below peers' roughly 80% and its own historical level of about 82%.

• Shareholder compositionAnalysis of holdings by dividend/income-oriented funds

  Compare dividend yield with the holding ratio of income-oriented funds.

  The report believes NVDA's current dividend yield is only 0.02%, and the holding ratio of income-oriented funds is about 16%, below the technology peer average of about 32%; increasing the dividend could broaden the shareholder base.

• Institutional methodologyBofA iQmethod

  BofA Global Research's standardized system of business performance, earnings quality, and valuation metrics.

  The report states that iQmethod is used to maintain consistency in global research metrics, including ROE, operating margin, free cash flow, cash realization ratio, net debt-to-equity, and valuation multiples.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NVIDIA Corporation (US.NVDA)

  Primary covered name; Buy rating maintained.

  Strengths

  Leader in AI computing and networking markets; strong free cash flow generation; clear advantages in ecosystem, supply chain, and software libraries; high adoption among enterprises and developers.

  Weaknesses

  Current dividend yield is extremely low, and FCF return ratio is below peers; high index weight may limit incremental allocation by benchmark investors.

  Comparison

  Relative to the Mag-7 and large-cap technology peers, NVDA trades at a discount on P/E, EV/FCF, and PEG, while its FCF scale is close to the combined level of Apple and Microsoft.

  Risks

  AI chip competition, export restrictions to China, volatility in AI projects, gaming cycles, regulatory scrutiny, and slowing capital returns.

• Apple Inc. (AAPL)

  Comparison target for cash returns and dividend yield.

  Strengths

  Historically attracted stable shareholders through free cash flow returns, with a dividend yield of about 0.4%.

  Weaknesses

  Growth rate is lower than NVDA's.

  Comparison

  The report believes NVDA's free cash flow scale could approach the combined level of Apple and Microsoft, while its valuation still remains at a discount.

  Risks

  As a comparison target, the report does not elaborate on Apple's standalone risks.

• Microsoft Corporation (MSFT)

  Comparison target for cash returns, dividend yield, and market weight.

  Strengths

  High holding ratio among income-oriented funds, with a dividend yield of about 0.8%.

  Weaknesses

  Growth rate is lower than NVDA's.

  Comparison

  Microsoft, together with Apple, forms the core reference point for NVDA's free cash flow scale and market weight.

  Risks

  As a comparison target, the report does not elaborate on Microsoft's standalone risks.

• Advanced Micro Devices Inc. (AMD)

  AI chip competitor.

  Strengths

  A participant in commercial GPU competition.

  Weaknesses

  The report believes NVDA can still maintain more than about 70% of AI value share.

  Comparison

  AMD is listed as one of the sources of commercial chip competition faced by NVDA.

  Risks

  If AMD competes more strongly than expected, it could pressure NVDA's growth and valuation.

• Broadcom (AVGO), Google, AWS

  Sources of competition from ASICs and internally developed chips at cloud vendors.

  Strengths

  ASICs and internal cloud projects may replace part of general-purpose GPU demand in certain workloads.

  Weaknesses

  The report believes NVDA still has advantages in broader product breadth, software ecosystem, and supply chain.

  Comparison

  These competitors constitute non-cash-return factors behind NVDA's valuation discount.

  Risks

  ASIC penetration or acceleration of in-house development by cloud vendors could weaken NVDA's AI computing share.

Key data

• RatingBUYThe report maintains a Buy rating.
• Target price300.00 USDThe target price is based on 28x CY27E ex-cash P/E.
• Current price208.27 USDPrice disclosed in the report.
• Expected upside44.0%Calculated based on target price of 300.00 USD and current price of 208.27 USD.
• CY26/27E P/E26.0x / 19.0xSignificantly below the Mag-7 average of about 49.1x / 41.5x.
• CY26/27E EV/FCF28.2x / 20.2xBelow the peer average.
• PEG0.36xBelow the peer average of about 2.61x.
• CY26-CY27E free cash flowmore than $400 billionThe report says it is close to the combined level of Apple and Microsoft.
• Past three years FCF return ratio47%Below peers' roughly 80%.
• Current dividend yield0.02%Clearly below Apple's about 0.4% and Microsoft's about 0.8%.
• Income-oriented fund holdings16%Below the technology peer average of about 32%.
• S&P 500 weightabout 8.3%Higher than the past peaks of Apple and Microsoft, which may limit incremental holdings by benchmark-oriented investors.

Impact & implications

If NVDA increases dividends and buybacks, it could attract more dividend-growth and income-oriented funds, forming a more stable shareholder base and reducing market concerns over uncertainty in capital allocation. The report believes this would help narrow NVDA's valuation discount relative to large-cap technology peers. However, the stock still faces risks including crowded positioning, intensifying competition, restrictions related to China, regulation, and volatility in AI projects, so valuation rerating requires joint validation from both improved cash returns and sustained growth.

Risks

• Weakness in the consumer gaming market.
• Intensifying competition in AI and accelerated computing from large companies, internal projects at cloud vendors, private companies, AMD, and ASIC chips.
• Export restrictions on computing chips to China having a greater-than-expected impact, or regional activities facing further limitations.
• Volatile and hard-to-predict sales in new markets such as enterprise, data center, and automotive.
• Capital return improvement falling short of expectations or slowing.
• Increased government scrutiny of NVDA's dominant position in AI chips.
• NVDA's excessive weight in the S&P 500 may limit further increases in holdings by some benchmark-oriented investors.

What to watch

• Whether the company announces a higher dividend yield or an expanded buyback plan.
• Whether CY26-CY27 free cash flow approaches the report's forecast of more than $400 billion.
• Whether the holding ratio of income-oriented and dividend-growth funds in NVDA increases.
• Whether NVDA's discount in P/E, EV/FCF, and PEG versus the Mag-7 narrows.
• Progress by competitors such as AMD, Broadcom, Google, and AWS in AI accelerators and the ASIC market.
• The impact of export restrictions to China, the pace of AI project deployment, and power supply constraints on demand.
• Regulators' scrutiny trends regarding concentration in the AI chip market.