It’s Not Totally Crazy That Nvidia Could Become The World’s Most Valuable Company, But…

It’s Not Totally Crazy That Nvidia Could Become The World’s Most Valuable Company, But…
Andrew Rummer

about 2 years ago3 mins

  • Nvidia has had a stunning run, prompting some investors to predict it could become the world’s most valuable company within five years.

  • The chipmaker is rapidly expanding from its core graphics chips into data centers, cars, and other exciting sectors.

  • But while there’s certainly an argument that Nvidia shares can rise further from here, overtaking the mighty Apple may prove too challenging.

Nvidia has had a stunning run, prompting some investors to predict it could become the world’s most valuable company within five years.

The chipmaker is rapidly expanding from its core graphics chips into data centers, cars, and other exciting sectors.

But while there’s certainly an argument that Nvidia shares can rise further from here, overtaking the mighty Apple may prove too challenging.

Mentioned in story

There’s no doubt Nvidia has been one of the stock market’s biggest recent success stories, with the chipmaker going from 41st-biggest company in the S&P 500 two years ago to eighth-biggest. Still, the most optimistic bulls think Nvidia’s just getting started, and some even think it’ll take the number one spot from Apple within five years. So are they onto something?

What would be needed to topple Apple?

Nvidia’s market value has doubled over the past year, reaching an impressive $680 billion.

Nvidia and Apple market capitalization
Nvidia and Apple market capitalization

To reach Apple’s current $2.8 trillion valuation, however, it would need to double and then double again – all while the iPhone maker stands still and allows Nvidia to catch up. 

That may sound fanciful, but Nvidia’s potential is prompting some investors to make spectacular predictions about the chipmaker’s future growth. Beth Kindig of the tech-focused information service IO Fund, for one, reckons it’ll take Apple’s crown by 2026. 

What are the bulls’ arguments?

There are clear reasons why Nvidia has become the world’s most valuable chipmaker, not least because Nvidia’s profit is on course to imminently overtake that of once-fearsome rival Intel

Nvidia and Intel’s net profit figures are converging
Nvidia and Intel’s net profit figures are converging

But the heart of Kindig’s argument is that just as Apple reached its current massive valuation by dominating the market for smartphones, Nvidia can achieve similar dominance in artificial intelligence (AI). And while the “mobile economy” contributes about $4.4 trillion to global economic output, the AI market could grow to as much as $15 trillion by 2030 – up from about $2 trillion in 2018.

Nvidia’s chips, you see, are integral to the data centers that host AI tools in the cloud. And the company is driving hard into other hot areas like self-driving cars and the metaverse, with its Omniverse platform for creating 3D online spaces. Its processors are also a go-to for crypto miners, even if that only provided about $100 million of last quarter’s $7 billion in revenue. 

With exposure to so many buzzy sectors, it’s no wonder Nvidia consistently features among the most-discussed stocks on retail trader forums like Reddit’s WallStreetBets. And when you see how effectively the company has expanded beyond its core graphics chips (it’s grown revenue by an average of 57% over the last eight quarters), it’s easy to understand why so many investors are in love with the stock. 

So is Apple’s crown in danger?

While Nvidia’s valuation may have already soared past Intel’s, Apple is another challenge altogether. And Nvidia is hardly an undiscovered gem: it already trades at about 55x this year’s estimated profits, nearly twice the 30x valuation ascribed to both Apple stock and the NYSE FANG+ Index of global tech giants. 

Nvidia and Apple’s price-to-earnings ratios
Nvidia and Apple’s price-to-earnings ratios

So with investors already paying a hefty premium for Nvidia over Apple, the company’s earnings will have to do the heavy lifting in any drive to overtake Apple. 

Handily, Nvidia’s adjusted net income is forecast to more than double over the next two years to $13.1 billion, according to Bloomberg data. That will be helped by an expansion in its already impressive net profit margin from 31% to 41%. But get this: Apple’s annual profit is forecast to hit an immense $98 billion by then. 

If we assume Apple’s net income stays at that level through 2026 and that the relative valuation of the two stocks also remains constant, Nvidia would have to grow its profit to about $54 billion. That may be a step too far, even with the benefit of its AI-driven expansion. 

And assuming Nvidia’s share count stays constant, its stock price will need to exceed $1,100 to hit a $2.8 trillion valuation. Even the most bullish mainstream analysts on Wall Street only ascribe a 12-month price target of $400. 

Put simply, Nvidia could conceivably make an attractive longer-term investment even at 55x earnings, but toppling Apple by 2026 seems like a reach. 

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