This Nvidia move has sparked criticism, but it could help the stock, one analyst says

By Britney Nguyen

The chip maker's investments into its own ecosystem are being criticized by some for resembling bubble behavior, but Melius analysts say they could send the stock higher

Nvidia's stock could go higher as a result of its investments into companies within its ecosystem, Melius analysts said.

After Nvidia Corp. announced a $100 billion investment in artificial-intelligence startup OpenAI last month, critics suggested the move was a type of "circular" play by which the company was giving money to companies that would then spend it on chips.

But analysts at Melius Research said that they don't think Nvidia's (NVDA) investments into its own ecosystem are a form of bubble behavior. Rather, they could prove a catalyst for the stock, the analysts noted.

The Melius team said in a Wednesday note that they project Nvidia's free cash flow will reach more than $600 billion in the next three and a half years. While the analysts previously thought Nvidia would "have no choice but to announce the biggest buyback program ever" with all that cash, they now think the company will look for other ways to spend, while devoting just 20% of the money to share repurchases.

In August, Nvidia increased its stock-buyback program by $60 billion, a record for the company, though the move sparked debate on Wall Street over whether a fast-growing company should be pouring so much into repurchases at the expense of more technology-oriented uses for that cash.

But Nvidia has shown that it's putting funds toward other objectives as well. Chief Executive Jensen Huang "is going to use cash to invest in his ecosystem to help grease the AI flywheel," the analysts said. They pointed to Nvidia's $250 million investment into CoreWeave Inc.'s (CRWV) initial public offering in March, which they said has led to a more than 240% return.

See more: What CoreWeave's new $6.3 billion contract with Nvidia says about the AI trade

The Melius team pushed back at critics who they said have called Nvidia's plan to invest $100 billion into OpenAI "'circular cash' or bubble-like.'" The chip maker said the investment will be made progressively as OpenAI deploys each gigawatt of its systems, which includes millions of graphics processing units, to support its AI infrastructure build-out.

The analysts pointed to Walmart Inc.'s (WMT) use of AI to optimize its supply chain and JPMorgan Chase & Co.'s (JPM) rollout of AI models to its employees as moves that could be viewed as bubble behavior.

"The desire to invest in AI to keep headcount flat is real," the analysts said, also reiterating their view that AI tools such as those from OpenAI are replacing software-as-a-service applications and traditional search engines.

Read: Google's rivalry with OpenAI just got more heated as a new threat to search emerges

The Melius team said that the industry hasn't "even seen the real spending on infrastructure for autonomous machinery and robots yet," and that they are bullish on Nvidia, which "has been investing in its ecosystem for years."

"So, if this 'circular cash' comes with 'beats and raises', the stock should go quite a bit higher," the analysts said.

Shares of Nvidia inched up 0.4% on Wednesday and are up almost 35% this year.

-Britney Nguyen

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10-01-25 1915ET