On the horizon of the corporate cosmos, three entities have ascended to the elusive $3 trillion market value echelon: the stalwarts of Microsoft, Apple, and Nvidia (NASDAQ: NVDA). While Microsoft and Apple reinforce their colossal valuations with immense operational clout, Nvidia’s soaring perch is fueled by lofty growth prospects that render its pedestal less stable. The question that now looms is whether Nvidia can sustain this astronomic valuation, or is it perched on a precipice of potential descent?
Nvidia’s Leap to Dominance
With a dominance etched in the markets, Nvidia’s trajectory has been propelled by the surging demand for artificial intelligence (AI). Its graphics processing units (GPUs) form the bedrock of AI evolution, imperative for shaping and operating these futuristic business models. The parallel computational prowess of GPUs makes them a linchpin for AI developments, amplifying possibilities when clustered. This synergy fuels the creation of expansive AI systems efficiently, catalyzing Nvidia’s meteoric surge over the last eighteen months. Moreover, Nvidia’s supremacy in the industry is unrivaled, with its nearest rival Advanced Micro Devices lagging significantly in the AI domain.
The insatiable hunger for its cardinal product has propelled Nvidia’s trailing twelve-month revenue from $30 billion to $80 billion in a mere nod of time.
Prognosticated for its fiscal 2025 conclusion, analysts anticipate Nvidia to harvest $120 billion in revenue, poised to crescendo to $161 billion in FY 2026. This surge would undoubtedly kindle widespread investor jubilation.
Delineating Growth Baked into the Stock
Yet, the stock’s valor is imbued with copious growth baked into its price.
Although sales growth heralds a company’s future, investors gravitate towards earnings, gravitating towards metrics like the price-to-earnings (P/E) ratio or the forward P/E ratio for stock valuation.
Distinctly for Nvidia, these metrics stand in stark contrast to each other.
The stock, currently trading at 72 times trailing earnings and 46 times forward earnings, resonates an encapsulation of 59% earnings growth within its share price. A monumental figure, eclipsing recent reports wherein Nvidia’s earnings per share (EPS) skyrocketed by 629% year over year in Q1 FY 2025.
However, such astounding figures are unlikely to perpetuate, as the subsequent quarters herald tougher year-on-year comparisons, aligning with the inception of the GPU rush last year’s Q2.
Impending this juncture is the lingering query: Can Nvidia safeguard its $3 trillion valuation?
Striving for Profit and Revenue Growth Parity
The $3 trillion magnates – Microsoft and Apple – have typically traded at approximately 30 times trailing earnings over the bygone five-year horizons. Although historically lofty, this hasn’t deterred their standing as preeminent firms. Nvidia, too, stands as a sui generis entity, boasting remarkable profit margins and market leadership. Consequently, pegging Nvidia at 30 times earnings forms the bedrock of my thesis.
Juxtaposed with the current $42.6 billion profit over the past year, Nvidia would need to scale the summit to $100 billion annually to align with the requisites for such an esteemed valuation.
Another facet to ponder is Nvidia’s narrative. At no juncture in history has Nvidia ascended to the echelons of profitability it currently stands. The archaic narrative echoes a tale of exclusive products commanding exorbitant prices, effectively dictating terms to consumers. Though, this zenith may inevitably precipitate obsolescence upon encountering rising competition – a prospect currently incubating. Amid a resplendent backdrop of innovators spurring to design proprietary chips, intruding upon Nvidia’s domain, a foreboding precedent looms.
In the eventuality of a profit margin downturn to a dwindling 30%, reminiscent of pre-AI boom epochs, Nvidia would warrant churning out $333 billion in sales to fortify its valor. While historical profit margins may evade reinstatement, preserving current levels amid burgeoning competition portends imminent challenges.
For Nvidia to straddle atop a $3 trillion market cap or thereabouts, fidelity to revenue and profit margins is paramount. A Herculean feat, given the horde eying the throne. While the precipitous decline may elude Nvidia’s vista, stock pulsations symptomizing the lofty anticipations ingrained in prevailing prices may inevitably reverberate.
Considering an Nvidia Investment?
Prior to venturing into Nvidia shares, a critical point of reflection is warranted:
The discerning Motley Fool Stock Advisor analysts have unearthed ten stocks primed for investor dalliance, eschewing Nvidia from the elite. This coterie of stocks promises gargantuan returns in the years to come, a league Nvidia falls short of.
Recall when Nvidia graced this roster on April 15, 2005. An imagined investment of $1,000 at the exalted recommendation could now burgeon to $761,658!*
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