Bank of America has identified a significant undervaluation in the shares of NVIDIA, suggesting that investor concerns over the AI chip giant's risk profile have been overstated, thereby creating what the firm describes as a compelling opportunity.

Analyst Vivek Arya noted in a research report that a conceptual sum-of-the-parts valuation based on free cash flow deployment indicates the stock could be trading at a discount ranging from 34% to 50%, even after accounting for financing risks.

According to the bank, the most robust counter-argument to this apparent discount would be for the company to allocate a larger portion of its free cash flow toward share buybacks, thereby boosting direct cash returns to shareholders.

However, Bank of America also cautioned that if demand for artificial intelligence were to decelerate, both the growth trajectory and the balance sheet strength of NVIDIA could come under pressure.

On Tuesday, NVIDIA shares slipped 1.8%, moving in tandem with a broader decline across other AI-related stocks.