Nvidia (NASDAQ: NVDA) The stock made headlines Wednesday by becoming the third US public company to cross the $3 trillion market cap threshold. In January 2022, Apple was the first to achieve the famous feat, followed Microsoft in January 2024. A chorus of many investors believe that Nvidia will definitely take the market cap crown from Microsoft at some point in the near future.
Let’s take a look at what drove Nvidia stock to such impressive heights and what investors can expect from the chipmaker in the future.
Chipmaker to the stars
Nvidia has been on fire in recent years as the interest generated by artificial intelligence (AI) has spread like wildfire. However, it is important to look back because not too long ago investor sentiment has decided against Nvidia. Consider this: Between November 2021 and October 2022, Nvidia shares fell more than 66% in the face of macroeconomic problems. Gamers put up with old graphics cards, and businesses have no interest in upgrading their data centers.
“This too shall pass,” or so parents say. The arrival of generative AI in early 2023 is causing a paradigm shift in technology, and investors will soon realize that Nvidia’s data center chips are at the heart of the AI ​​revolution.
In short, generative AI is a new branch of AI that can create original content, and unlike its predecessors. These AI models can write poems, create new songs and music, and even create digital paintings and other images. The system’s new capabilities immediately caught the attention of technologists who realized that the same system could be configured to design emails, generate presentations, create charts and graphs, and even write and debug code. These capabilities can increase worker productivity, thereby saving businesses time and money – and the race is on.
The secret to Nvidia’s success is the parallel processing capabilities built into the graphics processing unit (GPU). In the simplest terms, parallel processing takes large computational tasks and breaks them down into smaller, bite-sized chunks, making short work of heavy tasks. The company has used this technology to advance previous versions of AI, so Nvidia is ready when generative AI arrives.
However, these AI models, with trillions of variable training data — called parameters — still require thousands of GPUs to complete the task. For example, to train OpenAI’s GPT-4, it takes more than 25,000 of Nvidia’s top A100 AI processors to complete the task. Now consider that each of these A100 chips costs about $10,000, or about $250 million, for training. only one AI models. Multiply that by all the cloud infrastructure providers, data centers, and enterprise-level businesses around the world that want to put AI into action, and the scale of the opportunity becomes apparent.
An enduring record of success
Nvidia wouldn’t be where it is today without the vision of CEO Jensen Huang. AI is now viral, but it wasn’t like that in 2013 when the enigmatic CEO pivoted Nvidia and bet the company’s future on this unproven technology.
Believing that AI is the future, Huang adapted parallel processing, which originally created life-like images in video games, and released it to handle the rigors of AI. And the rest, as they say, is history.
Nvidia has had a history of success before generative AI became the belle of the ball, but AI is now paying the bills. Over the past decade, Nvidia’s revenue increased by 2,260%, increasing its net profit by 11,530%. This has driven the stock price up 27,900%, and many believe the best is yet to come.
Nvidia’s meteoric rise will give way to a 10-for-1 stock split, which is scheduled to take place after the market closes on Friday. Research compiled by Bank of America Analyst Jared Woodard suggests that companies that do stock splits tend to gain 25%, on average, in the year after the split, compared to a 12% gain for S&P 500. This may be attributed to the same operational and financial excellence that drives the stock price to rise, which in turn leads to the stock split.
A look at Nvidia’s latest results paints a compelling picture. For the first quarter of fiscal 2025 (ending April 28), Nvidia’s revenue grew 262% year over year to a record $26 billion, while earnings per share rose 629% to $5.98. The results were driven higher by the data center segment, which includes AI processors, as revenue of $22.6 billion jumped 427%, supported by accelerating demand for AI chips.
What it means for the future of Nvidia
In recent months, investors have begun to question the staying power of AI, with some taking a “wait and see” approach, but the lessons of the results can be costly. One of the more conservative estimates of the size of the generative AI market is $1.3 trillion by 2032, according to Bloomberg Intelligence. Ark Invest CEO Cathie Wood is more bullish, suggesting a total market of $13 trillion by 2030. The reality is probably somewhere in between, but the truth is we don’t know how big the AI ​​market will be.
Do we know this. The deepest pockets of the tech giant are trying to compete for Nvidia’s gold standard GPU, which has been successful so far. Furthermore, Nvidia continues to spend a lot on research and development (R&D) to keep AI processors on the cutting edge. That amounted to almost $8.7 billion last year, or 14% of total revenue. With a head start of more than ten years and continued heavy spending on R&D, it will be difficult for competitors to “chip” in Nvidia’s leadership. That said, competition will come, but the size of the market suggests there will be more than one winner.
It’s also important to note that the $3 trillion market capitalization benchmark is entirely arbitrary. Investors would do well to monitor Nvidia’s operating and financial results — which are consistently stellar — for insight into the company’s continued prospects.
Finally, a note on pricing. The run-up in Nvidia’s stock price in recent years has driven its value to uncomfortable levels for many investors. The stock is currently trading at 72 times sales and 38 times sales, which is a huge find. However, this fails to account for Nvidia’s triple-digit growth over the previous four quarters, a trajectory that is expected to continue into the current quarter. However, Nvidia’s price/earnings-to-growth (PEG) ratio — which factors in that growth — clocks in at less than 1, the standard for undervalued stock.
Bears will argue that the threat of competition is real, stocks are expensive, and the future of AI is unknown. That said, Nvidia is the best way to make a claim on the windfall represented by AI. In my book, that makes Nvidia stock a buy.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions at Apple, Microsoft, and Nvidia. The Motley Fool has positions and recommends Apple, Bank of America, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Nvidia Reaches $3 Trillion Market Capitalization Before 10-to-1 Stock Split. Here’s What’s Next for Investors. this was originally published by The Motley Fool
