Nvidia Can Handle Being in the Trillion Dollar Club

Nvidia’s stock price has jumped 27% since the chip maker issued a blowout forecast with its fiscal first-quarter results last month, citing booming demand for its chips designed to power generative-artificial-intelligence capabilities in data centers. The stock had more than doubled for the year up to that point, so the additional lift has been especially noteworthy. It has also put the company’s market value in spitting range of $1 trillion: The stock has breached that level a couple of times since on an intraday basis but has yet to close above it.

Regardless, Nvidia is now worth twice as much as the next-largest semiconductor company by market value. That would be Taiwan Semiconductor Manufacturing—the chip-manufacturing behemoth more commonly known as TSMC. TSMC generates nearly three times Nvidia’s annual revenue and is actually the company responsible for producing the chips that Nvidia sells. Nvidia also stands out among the existing trillion-dollar club; Apple, Amazon.com and Google-parent Alphabet each generate more than 10 times Nvidia’s annual revenue.

Analysts aren’t worried. Most boosted their price targets on Nvidia’s shares following the latest results, and more than three-quarters of the price targets published by FactSet value the company above $1 trillion. But investors are evidently growing more skittish following the big run; Nvidia’s shares have slipped 3% since peaking on May 30. “On the desk we have seen some owners trimming AI winners and it feels like the stocks are running a bit out of steam," wrote Bernstein analyst Keith Murray in a recent report.

Nvidia’s history gives investors some grounds to be wary. The stock has seen big spikes before, only to fall suddenly and sharply as business conditions change.

One such occurrence took place in late 2018, when a drop in cryptocurrency prices hurt sales of Nvidia’s chips that were used to mine Ethereum. Another plunge started in late 2021, when the company first seemed destined for the trillion-dollar club. That was sparked by a marketwide shift away from tech stocks, as well as an industrywide cooling of chip sales, which had been inflated by the pandemic’s early production shortages. Nvidia’s market value peaked at around $835 billion then before shedding two-thirds over the following year.

Still, the strong business growth Nvidia is experiencing won’t be a flash in the pan. The company’s forecast of $11 billion in revenue for the second fiscal quarter ending in July shocked analysts, who had been expecting about $7.2 billion. It is also 53% above the revenue Nvidia reported for the just-ended quarter—representing the company’s largest sequential jump since 1998, according to data from S&P Global Market Intelligence. In a conference call following the results, Nvidia Chief Financial Officer Colette Kress noted that strong demand “has extended our data center visibility out a few quarters, and we have procured substantially higher supply for the second half of the year."

Thus, Nvidia is now expected to boost revenue by 55% in the current fiscal year ending in January—and average annual growth of 29% over the next three fiscal years, according to consensus estimates from FactSet. Its data-center segment that sells the AI chips now in such hot demand is expected to see revenue nearly double this year to almost $28 billion—more than the annual revenue Nvidia has ever generated for the entire company in prior years.

And it won’t be growth for the sake of growth. Nvidia’s commanding lead in the chips and associated software required for data-center AI gives it enormous pricing power. Stacy Rasgon of Bernstein estimates that the company’s latest H100 chip designed for generative AI uses sells for $25,000-$30,000 apiece—two to three times the price of its predecessor A100 chip. Analysts thus expect Nvidia’s adjusted operating margins to hit 48% this year and top 50% over the next three years—a significant jump from the 39% annual margin the company has averaged over the last five years.

Nvidia’s near-term earnings prospects are such that the stock’s valuation has actually gotten cheaper. Nvidia shares are now trading at 44 times forward earnings compared with 60 times ahead of the recent report, as analysts have boosted their per-share earnings projections for the next two fiscal years by 60%, according to FactSet. A trillion dollars or no, Nvidia has earned its place in the big leagues.