On the morning of July 9, Nvidia (NVDA 0.53%) became the first company to surpass $4 trillion in market cap -- an achievement still out of reach for tech giants Microsoft and Apple.

The accomplishment is even more impressive considering it has been just two years since Nvidia passed $1 trillion in market cap. Apple and Amazon reached $1 trillion in 2018 and Microsoft followed suit in 2019.

Here's why Nvidia has emerged as the most valuable company in the world, why real results support the narrative, and why the growth stock could have more room to run for patient investors.

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Image source: Getty Images.

Profiting from paradigm shifts

The simplest reason as to why Nvidia is up nearly 15-fold in just five years is that the company's business model has transformed from being largely dependent on end markets like gaming and professional visualization (digital content and computer-aided design) to selling graphics processing units (GPUs) for high-performance computing and cloud infrastructure.

Artificial intelligence (AI) workloads are demanding more from data centers. Central processing units (CPUs) are ideally suited for processing sequential tasks, like basic calculations and internet browsing. GPUs are better at parallel processing, which involves handling massive amounts of information from large datasets and achieving higher throughput. GPUs have become the backbone of training AI models, so cloud computing hyperscalers are investing substantial capital expenditures in purchasing GPUs.

In addition to the hardware, Nvidia develops software and associated infrastructure, providing an AI ecosystem for data centers. Nvidia's Compute Unified Device Architecture (CUDA) software platform, high-speed interconnects and switching chips, storage solutions, and cooling systems are examples of products and services that complement its GPUs. All together, these solutions combine to form what Nvidia calls AI factories, which are specialized data centers purpose-built for AI rather than traditional computing tasks.

In a figurative sense, Nvidia is a steelmaker at the dawn of the age of skyscrapers. Data center construction evolved from wood, stone, and bricks to concrete and steel. And Nvidia is the top supplier in town, designing extremely complex GPUs and AI systems.

A blueprint for sustained growth

Since Nvidia has little competition and its products are in high demand, it can afford to charge a premium price that its hyperscale customers, with deep pockets, are more than willing to pay, as they have the cash to spend.

Top Nvidia customers, like Microsoft Cloud, Amazon Web Services, Alphabet's Google Cloud, and Meta Platforms, have impeccable balance sheets and high margins. So they can afford to pay top dollar for Nvidia's AI solutions.

Nvidia's impeccable results come from rising AI demand and the company's ability to convert such a massive amount of its revenue into earnings. In fact, Nvidia converts more than $0.50 of every dollar in revenue into net profit.

Nvidia's stock price has surged because its margins have remained high while it has grown revenue exponentially. Nvidia not only has the largest market cap of any company in the world, but it also generates the fourth-most net income -- behind only Alphabet, Apple, and Microsoft. So while the stock isn't as inexpensive as some of its peers, Nvidia isn't purely valued on future results. The company is already making a ton of money. Its growth could slow, but it will still likely grow its net income faster than Alphabet, Apple, and Microsoft, becoming the most profitable company in the world in the next few years.

A foundational way to invest in the AI gold rush

Nvidia's results speak for themselves, but the future is largely dependent on sustained AI spending from key Nvidia customers. Nvidia's top customers need to prove to their investors that spending on AI is leading to measurable results. Meaningful earnings growth must follow high capital expenditures, or there may be pressure to pull back on spending. In other words, Nvidia is selling the picks and shovels, but its customers must continue striking gold or they will no longer need its tools.

Investors should only approach the stock if they have a high risk tolerance, a long-term investment horizon, and are willing to endure potential fluctuations in the company's results.

It wouldn't be surprising to see an eventual cooldown in AI spending once hyperscalers complete their foundational buildouts. It remains to be seen how Nvidia will perform once the market matures and if competition eventually catches up. But for now, the company is well positioned to maintain its lead over the competition because it can pour cash generated from the business into research and development for new technologies. Given its inherent advantages, it would take nothing short of a breakthrough for a competitor to take a meaningful slice out of Nvidia's AI market share pie.

With a 37.9 forward price-to-earnings ratio, at the time of this writing, Nvidia isn't the dirt cheap no-brainer buy it once was, but it is still a fair value for investors who believe in at least modest AI growth over time.

Nvidia is a good example of a company that looks overvalued if you just glance at the stock's price action, but is actually more reasonably valued once you account for the strength of the underlying business and the clear runway for future earnings growth.