Nvidia (NASDAQ:NVDA) made headlines by becoming the first chipmaker to achieve a $1 trillion market capitalization.
With its stock surging more than 10,870% over the past decade, some investors may consider taking profits. However, the question remains whether Nvidia has the potential to double its market cap and reach $2 trillion in the coming years.
It’s an interesting question, to be sure. Let’s dive into whether this company has what it takes
Nvidia Is the First Tech Company in the 1T Club
Nvidia experienced significant revenue growth over the past decade, with a compound annual growth rate of 20% from fiscal 2013 to fiscal 2023. The company’s revenue expansion was driven by the PC gaming and professional visualization markets, as well as its increasing presence in the data center market.
Nvidia’s revenue from the data center segment grew substantially, comprising 56% of its total revenue in fiscal 2023. In contrast, the gaming market accounted for a smaller portion, declining from 44% to 34% during the same period.
During the pandemic, Nvidia experienced significant growth in fiscal 2021 and fiscal 2022 due to increased demand for PCs and data center upgrades.
However, in fiscal 2023, the company faced challenges as revenue remained stagnant and adjusted EPS declined by 25%. This was primarily because of a decline in PC sales in the post-pandemic market and reduced spending by data center operators.
Additionally, rising interest rates negatively affected the valuations of growth stocks in the market.
Nvidia’s Valuation Can Be Tough to Beat
Nvidia has joined the trillion-dollar club as the first chip maker to reach this valuation. The company’s shares surged after announcing strong revenue forecasts, pushing its market capitalization above $1 trillion.
This achievement places Nvidia among the elite group of mega-cap tech stocks. According to Bloomberg, Nvidia is the ninth company in history to reach this milestone.
Nvidia’s success has influenced other companies in the AI chipmaking supply chain, but there are concerns about its rapid growth. Analysts caution it could be a “baby bubble” driven by high-interest rates.
Bank of America (NYSE:BAC) analyst Michael Hartnett points out that past bubbles began with substantial investment but ended when the Federal Reserve increased interest rates.
Nvidia’s partnership with Snowflake (NYSE:SNOW) has generated increased interest, leading to a surge in NVDA stock.
This collaboration allows Snowflake’s customers to create personalized generative AI assistants and chatbots using Nvidia’s NeMO toolkit and infrastructure. Businesses can now use their data more effectively, improving customer experience and operational efficiency.
Nvidia’s CEO, Jensen Huang, emphasized the importance of this partnership, emphasizing the shift towards moving computing to valuable data rather than the other way around.
Bet Your Money on Nvidia
Nvidia’s dominance in the semiconductor industry stems from its software capabilities, setting it apart from competitors like Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC).
Recognizing the significance of software in supporting Generative AI applications, Nvidia developed a strong software platform alongside its chips.
This strategic move has attracted cloud providers who are now upgrading to Nvidia chips, despite their higher prices due to limited supply.
However, if Nvidia’s revenue and earnings growth slows down to a 10% CAGR over the next seven years, it is unlikely to sustain its current valuations.
In such a scenario, its market cap could remain around $1 trillion by the end of the decade, even if its annual revenue and profits double.
To reach a $2 trillion valuation, assuming a more respectable 20% CAGR in revenue to $97 billion, Nvidia would need to trade at 21-times trailing sales, which is a best-case scenario and relies on maintaining its premium valuation.
Nvidia’s AI platform has positioned the company as a leader in the AI revolution, contributing significantly to its overall value, similar to the impact of Intel and Microsoft.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
