Massive News for Nvidia Stock Investors! | NVDA Stock Analysis

Nvidia is said to be financing or providing a backs stop for up to $250 billion for OpenAI's purchases of AI computing technology. Nvidia stock price is down more than 5% on the news as fears of circular financing increase. >> I want to thank the Mly Fool for sponsoring this video. Visit full.com/parkev for the 10 best stocks to buy now. So, the Wall Street Journal reported that Nvidia would effectively backs stop Open AI's compute buildout at a $250 billion scale. Investors are worried this looks like vendor financing on a historic level. Now, if you've been confused about what this all means, the circular financing, the bottom line or the most simplified way to think about this is that it lowers the quality of sales for Nvidia. It lowers the demand picture for Nvidia because the companies that are purchasing Nvidia's products are running out of money. And if you don't have the money to pay for a product, you don't have demand for a product, right? We would all love to have a Ferrari or a Lamborghini, but do we all have are we all demand for that product? Can the company count on us as potential customers? And the answer is for the most of us, no. They can't count on us as potential customers because we might not have the money to pay for those vehicles even if we would like to have them. And that's the growing concern for Nvidia's customers, many of which are now increasingly facing tighter budgets that might not have the money to purchase Nvidia's product. Nvidia's first quarter 2027 revenue hit $75 billion, which is up 92% year-over-year, with the CEO highlighting this insatiable demand for their products. But is there really insatiable demand for Nvidia's products if the customers that are buying them no longer can afford them, no longer have the money to pay for them? And that's the bigger question at heart here that's driving down Nvidia's share price. Now, as an Nvidia shareholder myself, I'll let you know how I'm thinking about this. Nvidia stock right now is trading at a forward price to earnings of just 15. Just 15. This is near the cheapest this stock has traded for according to this valuation metric going back to 2024. And the sentiment surrounding Nvidia stock has been sour all year long. This stock has not performed well year to date. In fact, after falling 4.6% today as of this recording, Nvidia stock is only up 5.2% on the year. That's trailing the S&P 500 index, which is up roughly 10%. and it's definitely trading some of its semicap semiconductor peers which are up in some cases by the hundreds of percentage points. So investors are also placing a greater premium for protecting against Nvidia's debt because Nvidia is becoming a riskier situation in their view. Nvidia is now uh in conversations on more than $750 billion worth of AI infrastructure deals, stoking fears that the company's taking on even more obligations. The report today of the $250 billion backs stop for OpenAI follows a report from Friday that the company would be entering into an agreement with SK Highix for its buildout of its manufacturing to scale up the high bandwidth memory that Nvidia uses in its systems. In my discounted cash flow valuation model for Nvidia stock, I forecasted tremendous growth for this business, which I'm estimating will grow from $183 billion in free cash flow in 2026, in fiscal year 2026, all the way up to $1.6 trillion in free cash flow by 2035. So these are very robust growth estimates for Nvidia between now and the next 10 years and this counts on the fact that the customers that are purchasing Nvidia's products will have the cash to pay Nvidia. But there's the difficult challenge. The challenge of artificial intelligence as it relates to the primary consumers of AI computing which are the large language models is timing. These companies have to spend large sums of money upfront and then they only recoup that money over an extended period of time. Think of it like buying a house without a mortgage and renting it out. You might pay a million dollar for a three-bedroom house in Los Angeles and rent it out for $5,000 a month. Imagine how long that will take you to recover your initial $1 million investment at $5,000 per month. It might take you 20 years to recoup your initial investment of $1 million. And that's the situation. Builders of artificial intelligence, data centers, and the large language models that are researching and developing these products, they face a similar situation. They're spending a lot of the money up front and they're only recouping that money in slower increments over an extended period of time which is creating a financing problem. It's not a problem of whether or not the product is in high demand or the product is being utilized or proving valuable. It's the timing of the cash flows that's creating the situation. And so for that reason, I'm not as concerned as many in the marketplace are. It's because I understand it's a timing issue and a monetization issue, especially since Open AI and Anthropic haven't gone public just yet. When they do go public, that will alleviate some of these concerns. Additionally, when these companies ramp up the monetization of their capabilities, that will also alleviate some concerns. As it stands, Open AI and Anthropic are losing tens of billions of dollars on the bottom line. Well, more so Open AI is losing close to 10 billion dollars on the bottom line according to some estimates I've seen. I can't be too sure because again they're not publicly traded companies. They don't report their financial results quarterly and so I can't look at their financial statements with my own eyes. I have to rely on estimates I'm hearing from other agencies that are reporting these developments. But I think it's reasonable to assume that these companies are losing billions of dollars on the bottom line and they need to enhance their monetization capabilities in order to put their businesses on a more sustainable footing. They can't continue on like this, losing all these billions of dollars on the bottom line. Nvidia for its part is helping facilitate the growth. Rather than telling these customers, "No, you can't have our product until you have the money to pay for it." Nvidia is telling them, "Let's get creative. Let's work out deals where you can still get our product and you can compensate us in maybe a different way. Instead of just giving us a cash payment, maybe you could give us a share of the company. Maybe you can give us this other thing. maybe you can give us this thing, maybe we can work out some other way of financing these transactions. And don't get me wrong, again, let me reiterate that this does lower the quality of sales for Nvidia. It's always a higher quality sale if you're selling a product, getting the cash, and the book is closed on that transaction. It's a lower quality sale if you have to offer terms. If you have to extend credit, if you have to wait for some other thing to get your money, if there's some additional condition attached to that sale, it's always a lower quality sale. And understandably, investors are growing concerned with more and more of the sales for Nvidia coming from these sources which are lower quality. Still Nvidia stock as you can see by its valuation you can look at it on a forward price to earnings basis or you can look at it on a discounted cash flow model. It looks significantly undervalued especially after today's decline at $197 per share. I calculate the fair value at $36 per share. It looks meaningfully undervalued. I own Nvidia stock as I mentioned. I'm interested in adding more Nvidia stock. It's already the largest position in my portfolio. I'm interested in adding even more shares. I have had Nvidia stock ranked as one of the best stocks you can buy right now. And I will be reiterating that recommendation today. I still think it's one of the best stocks you can buy