On the heels of the worst stock market performance in more than 10 years, technology stocks have bounced back, with the Nasdaq Composite up 29% so far this year. This recovery seems poised to add new members to the highly exclusive group of U.S. companies with a market cap worth more than $2 trillion. There are only two members of this select group as of the market close on Tuesday:
- Apple — $2.7 trillion
- Microsoft — $2.4 trillion
One company that seems ordained to join this privileged pair is Nvidia (NVDA 1.41%). The maker of graphics processing units (GPUs) only recently joined the elite group of companies with a market cap of $1 trillion but seems destined for greater things. Nvidia stock has soared in 2023, up more than 200% as of this writing, driven higher by strong demand for processors used to power artificial intelligence (AI) systems. Nvidia’s value would need to increase by 77% from Tuesday’s market close to join this prestigious club.
Let’s look at the multiple growth drivers that will combine to send Nvidia stock to new heights.
A long history of performance
A quick review of the factors that brought Nvidia to this rarified position suggests there could be greater gains in store. Over the past decade, Nvidia has increased its revenue by 582% (as of this writing), while its net income has increased by 1,620%. While there have been the usual ups and downs, the company’s consistent performance has helped fuel an epic rise in its stock price, which has soared 12,190%.
NVDA Revenue (Quarterly) data by YCharts
In the company’s fiscal 2024 first quarter (ended April 30), Nvidia’s performance was surprisingly resilient, particularly given the economic headwinds. Revenue of $7.19 billion was down 13% year over year, though strict cost controls drove diluted earnings per share (EPS) of $0.82 up 28%. Given the overhang of a 38% decline in gaming revenue, its overall lackluster performance wasn’t particularly surprising.
NVDA Revenue (Quarterly) data by YCharts
What did catch investors off guard was Nvidia’s outlook. For the current quarter, the company called for revenue of $11 billion, an increase of 64% year over year and 53% sequentially. Management attributed the rosy outlook to strong demand for the processors used for AI, driven by the accelerating adoption of generative AI.
This was evidenced by Nvidia’s record data center revenue of $4.28 billion — achieved in the face of economic headwinds — overtaking the gaming segment as the company’s primary breadwinner.
If Nvidia can build on that success, a recovery in the gaming market could supercharge the company’s results, driving it ever higher.
The AI connection
It’s important to note that much of this year’s stock price gains are the result of excitement surrounding the multitude of potential applications for AI. Analysts at Goldman Sachs estimate the economic impact at $7 trillion by 2030, while Morgan Stanley comes in at roughly $6 trillion. But even the most conservative estimates are eye-catching. TD Cowen analyst John Blackledge concludes that spending on generative AI software will top $81 billion by 2027.
We truly don’t know how the evolving AI market will play out, but the consensus is that it will be a big deal — and Nvidia’s state-of-the-art AI processors have it well-positioned to benefit from this secular tailwind.
Multiple growth drivers
As exciting as the potential for generative AI is, Nvidia has done just fine over the past decade without it. A look at several of its existing growth markets shows why this has been the case.
Nvidia remains the undisputed leader in the discrete desktop GPU market, even as sales have declined to levels not seen in decades. The company controls a dominant 84% share of the market, according to data supplied by Jon Peddie Research (via Tom’s Hardware). The gaming GPU market is expected to soar in the coming years, climbing from $2.7 billion in 2023 to $11.7 billion by 2028, a compound annual growth rate (CAGR) of 34%, according to Mordor Intelligence. The market for graphics cards will no doubt rebound — probably sooner than later — and when it does, Nvidia will benefit.
Then there’s the data center market. Nvidia has a market share of more than 95%, according to CFRA Research senior equity analyst Angelo Zino. The data center market is expected to continue its robust growth, climbing from $263 billion in 2022 to $603 billion by 2030, a compound annual growth rate of 11%, according to Prescient and Strategic Intelligence. The combination of a growing opportunity and market dominance provides Nvidia with another secular tailwind.
The company also has a lock on the machine learning market, a more established field of AI that produced self-improving algorithms. Nvidia has an estimated 95% share of that market, according to data compiled by New Street Research.
Nvidia currently sports a market cap of roughly $1.13 trillion, which means the stock would have to increase by less than 13% annually to achieve a $2 trillion market cap by 2028. Given the multiple growth drivers, rebounding gaming market, and strong secular tailwinds, that doesn’t seem like too high a bar to clear.
My money is on Nvidia.
Danny Vena has positions in Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Apple, Goldman Sachs Group, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.