Melius saw Nvidia's investment as a breakout, not a bubble. Will the stock rally continue?

Melius Research contradicted analysts who saw signs of bubble inflating in the latest deals of AI chip giant Nvidia. According to Melius, Nvidia's huge investments in ChatGPT developer OpenAI and similar projects could be a driver of its stock price growth. The company's shares set a new record in trading on October 2.

Analysts at Melius Research believe that chipmaker Nvidia's investments in its own ecosystem are not a sign of a "bubble," as a number of other Wall Street experts warned earlier. On the contrary, they may become a catalyst for the growth of quotations, reports Melius MarketWatch.

In September, the company announced a $100 billion investment in artificial intelligence developer OpenAI. Skeptics called this move a "circular" scheme: Nvidia invests in partners who then spend money on its own hardware. But Melius analysts remind that the market has not yet seen major investments in infrastructure for autonomous cars and robots, and that's where the next round of growth for Nvidia may lie.

"If this kind of 'circular money' is accompanied by ahead of forecasts and higher guidance, stocks should rise even more," Melius summarized.

In addition, experts predict that in the next 3.5 years, Nvidia will be able to generate free cash flow of more than $600 billion. Previously, it was assumed that the company will use these funds for the largest share buyback program in history. However, analysts now believe that only about 20% will be spent on the buyback program, and the bulk of the funds will be invested in the development of the ecosystem.

In August, Nvidia expanded its $60 billion share repurchase program, which became the subject of a lively debate on Wall Street. Investors debated whether it was justified for the fast-growing technology leader to spend so much money to return capital to shareholders instead of investing in innovation, according to MarketWatch.

Meanwhile, Nvidia is showing that it knows how to use capital in other ways. CEO Jensen Huang intends to actively invest in the ecosystem, "greasing the AI flywheel." As an example, Melius analysts cite a $250 million investment in the CoreWeave IPO in March, which has already brought the company more than 240% return.

As for the deal with OpenAI, Nvidia specified: the investment will be transferred in stages, depending on the commissioning of each new gigawatt of capacity, including millions of GPUs for AI infrastructure. According to analysts, this once again confirms that this is not speculation, but a strategic partnership.

The market also perceives investments in the ecosystem not as a "bubble" but as a long-term bet on leadership in AI, Barron's notes. This is also reflected in the growth of quotations of the largest chip manufacturers.

Nvidia shares set a new record on October 2, rising 2% to $191.05. The company's market capitalization now stands at about $4.6 trillion. Shares of other chipmakers - Broadcom, AMD and Intel - also added 1-2% in value.

The rise is connected with the revival of interest in investments in artificial intelligence, which has been reinforced by OpenAI's recent moves. The main reason was the company's new video generation application, Sora, which rapidly rose to the top of the App Store, repeating the success of ChatGPT, Barron's writes.

An additional driver was OpenAI's announced partnership with South Korean corporations Samsung Electronics and SK Hynix. The partnership is aimed at expanding the supply of advanced memory chips and building new data centers, which further strengthened market optimism.

This article was AI-translated and verified by a human editor