Nvidia’s stock price has soared to unprecedented heights, fueled by the AI boom and the company’s dominant position in the GPU market. However, this meteoric rise has raised questions about its valuation. Is the future already priced into the stock, or are there still significant upside opportunities?
To justify a $3.5 trillion valuation, Nvidia would need to deliver extraordinary growth and profitability over the next several years. Let’s break down the math:
First we have to take a look at NVIDIA Corporation’s outlook for the current quarter. Here is what the company said:
• Revenue is expected to be $32.5 billion, plus or minus 2%.
• GAAP and non-GAAP gross margins are expected to be 74.4% and 75.0%, respectively, plus or minus 50 basis points. For the full year, gross margins are expected to be in the mid-70% range.
Photo by Christian Wiediger on Unsplash
Nvidia’s market cap is more or less $3.5 trillion. This means investors expect NVDA to earn around $180 billion per year once it becomes a more mature company like Alphabet Inc (GOOGL) which is currently trading at a forward P/E multiple of 19. NVIDIA Corporation’s quarterly revenue and profits are probably around $33 billion and $18 billion respectively right now. Is it reasonable to assume that NVDA’s quarterly profit can go from $18 billion today to $45 billion in a few years and then continue to grow at the same rate that GOOGL’s quarterly profit is growing?
If NVDA manages to earn $180 billion in after-tax profits in a few years and then its profits continue to increase at around 10% annual rate, its market valuation will probably be around $3.5 trillion. That means NVDA investors will generate a total return of zero percent if NVDA satisfies the expectations embedded in its current stock price. For NVDA investors to generate a modest 10% annual return, NVDA needs to generate close to $250 billion in annual after tax profits by 2028.
While we acknowledge NVDA’s market dominance and potential as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock. Disclosure: None. This article was originally published at Insider Monkey.