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NVIDIA Stock: The Next Trillion-Dollar Company?

The chip maker is currently the ninth most valuable company in the world. Could it be next in line to join the trillion-dollar club?

At last check, semiconductor company Nvidia  (NVDA) - Get NVIDIA Corporation Report had a market cap of $682.8 billion. That makes it No. 9 on the list of the 10 most valuable companies in the world.

In November 2021, the company's stock reached an all-time high with a share price of $347 and a market cap that exceeded $800 billion. NVDA grew more than 125% during 2021. And looking at the past five years, the stock has grown by nearly 1,000%.

If Nvidia can maintain the strong growth it has seen over the last few years, it's possible it could become the next company whose market cap surpasses $1 trillion.

But many analysts think Nvidia's valuations are already stretched. Let's take a closer look at the possibility of NVDA reaching a market cap of $1 trillion.

Figure 1: NVIDIA’s office.

Figure 1: NVIDIA’s office.

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Is Nvidia Worth $1 Trillion?

Like many technology companies, the market prices NVDA primarily on its potential, rather than the actual units the company has produced.

Nvidia has direct exposure to three major tech markets:

  1. The global semiconductor market, which is expected to reach $803.15 billion in 2028 at a compound annual growth rate (CAGR) of 8.6%
  2. The gaming market, which has been valued at $155 billion and is expected to grow at a CAGR of 14.5% by 2026
  3. The artificial intelligence (AI) market, which is expected to reach $62 billion in 2022 and to grow at a CAGR of 36% to $641 billion by 2028.

Looking at Nvidia's valuation, it's hard to conclude whether its high multiples actually reflect its full growth potential in these markets.

NVDA currently trades at a price-to-earnings (P/E) multiple of 83.4 times, which indicates that the market is willing to pay nearly double the profit of competitor AMD  (AMD) - Get Advanced Micro Devices, Inc. Report, which trades at a P/E of 40 times, and eight times the profit of Intel  (INTC) - Get Intel Corporation Report, which trades at a P/E of 10.6 times.

However, one of the factors that may help explain Nvidia's stretched P/E ratio is the company's profitability. Nvidia has a very high gross margin of 64%. That's higher than its main peers like Qualcomm  (QCOM) - Get Qualcomm Inc Report at 57%, Intel at 56%, and AMD at 46%. Better margins might mean more predictable or stable earnings going forward.

Also, Nvidia has the highest five-year net profit CAGR forecast, compared to its main peers. See below:

Figure 2: NVIDIA and peers net profit 5-years CAGR.

Figure 2: NVIDIA and peers net profit 5-years CAGR.

The Bottom Line

Nvidia's latest earnings report showed solid earnings and robust guidance for 2022. That led the market to send its stock to an all-time high and its market cap past the $800 billion mark

Even if its current valuations are stretched, it wouldn't surprise me if the market reaction to Nvidia remains favorable, driven by the potential of the growing markets it serves.

WIth high profit margins and strong profit growth potential compared to its peers, it may be only a matter of time before Nvidia has a market cap of more than $1 trillion.

The big question is: How long will this take?

In the short term, the market is punishing high-valuation stocks in the expectation of rising interest rates. But in the long term — say, within five years — Nvidia should be on track to becoming a trillion-dollar company.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)