Nvidia (NVDA +0.10%) made history on Tuesday, sailing past Microsoft to become the world's most valuable company, with a market cap of $3.335 trillion.
The stock has been on a meteoric rise over the past 18 months, soaring 8,280% since the start of 2023 (as of this writing). Nvidia has been riding the wave of accelerating adoption of artificial intelligence (AI), providing the graphics processing units (GPUs) that are the gold standard for powering the systems responsible for AI training and inference.
The company also completed a 10-for-1 stock split that was a hit with investors, driving the stock even higher.
With gains of that magnitude, it would be easy to conclude that the opportunity has passed, and the easy money has already been made. I think that view could be a costly one, as I predict that Nvidia's market cap is headed to $5 trillion, which would push its share price above $203, representing upside of 50% compared to the Tuesday's closing price.
Let's take a look at how Nvidia could get there in the not-too-distant future.
The Nvidia GB200 Grace Blackwell Superchip. Image source: Nvidia.
More of the same
Generative AI burst onto the scene last year, touting the ability to streamline and automate time-consuming and mundane tasks. The potential to increase worker productivity was met with cheers from corporate America as companies race to adopt these next-generation algorithms.
Nvidia supplies the processors with the computational horsepower necessary to run these AI systems. The company has been scrambling as demand has far outstripped supply. The supply shortages are beginning to ease as Nvidia has worked with its partners to ramp up production.
Furthermore, the company has a virtual monopoly on machine learning (an earlier branch of AI) with an estimated 95% share of the market, according to data compiled by New Street Research. This helps explain why demand for generative AI quickly became a boon to Nvidia, given its proven expertise in the area.
There's more: The need to upgrade data centers to handle the rigors of AI has been at the heart of the current demand cycle, which is expected to continue. The vast majority of generative AI processing takes place in data centers and in the cloud, and it's estimated Nvidia controls 92% of the data center GPU market, according to IoT Analytics.
Robust growth is expected to continue across the data center market, climbing from $302 billion in 2023 to $622 billion by 2030, according to Prescient and Strategic Intelligence Market Research. As the leading provider of data center GPUs, this trend favors Nvidia.
Let's not forget, however, that it all began with the humble GPUs used to render lifelike images in video games, another area Nvidia dominates. Despite growing competition, it maintains a healthy lead in the industry it pioneered. In the first quarter of 2024, it controlled an 88% share of the discrete desktop GPU market, according to Jon Peddie Research.
As inflation subsides, the pent-up demand for new, state-of-the-art graphics cards will drive a new upgrade cycle for Nvidia gaming chips. Sales of gaming GPUs are expected to soar from $2.7 billion in 2023 to $11.7 billion by 2028, according to Mordor Intelligence. As the market leader, this trend also favors Nvidia.
The company has a number of other opportunities that could take off, including self-driving cars, professional visualization, and quantum computing, which currently make up just a small percentage of the company's overall sales.
Lastly, the Nvidia GB200 Grace Blackwell Superchip will be released later this year, setting a new standard for AI processing. The largest hyperscale cloud-infrastructure providers are already lining up to pay top dollar for these state-of-the-art AI platforms, which suggests the company will remain as the AI market leader.
NASDAQ: NVDA
Key Data Points
The path to $5 trillion
Nvidia currently has a market cap of roughly $3.34 trillion, which means it will require stock price gains of roughly 50% to drive its value to $5 trillion. That seems like small change compared to its 2024 year-to-date gains of 174%, so it's likely just a matter of time.
According to Wall Street's consensus estimates, the company is expected to generate revenue of $120.5 billion in fiscal 2025 (which began in January). That gives the stock a forward price-to-sales (P/S) ratio of roughly 28. If that P/S remains constant, Nvidia will need to generate annual revenue of roughly $180 billion to support a $5 trillion market cap.
Coincidentally, Wall Street is already guiding for revenue growth of 98% in fiscal 2025 (this calendar year) and 33% in fiscal 2026. If the company hits those targets, it could achieve a $5 trillion market cap as early as 2026.
Don't take my word for it. Rosenblatt Securities analyst Hans Mosesmann just reaffirmed his buy rating on Nvidia stock and assigned a Street-high $200 price target, citing greater demands for AI software and the release of the Blackwell architecture later this year.
It's important to note that there are no guarantees. Any failure to achieve investors' lofty ambitions -- real or perceived -- would likely be met with a quick and potentially brutal sell-off. On the other hand, it's just as likely that Nvidia's market dominance could continue, and the timeline calculated above could end up being conservative.
The stock is currently selling for 51 times forward earnings, which might seem expensive, but that doesn't take into consideration the stock's 27,570% gains over the past decade. To be clear, there's little chance the next decade will be as lucrative as the past 10 years have been.
That said, given Nvidia's dominant place in the industry and the gale-force secular tailwinds at its back, the chances it will be a market-beating investment in the coming years are exceptional.
