Three exceptional giants have scaled the rarefied air of a $3 trillion market cap – Microsoft, Apple, and Nvidia (NASDAQ: NVDA). While the former two are behemoths with the might to justify their lofty perch, Nvidia has ascended on wings of future growth promises.
However, the precipice on which Nvidia stands is far from stable, unlike its peers. The question looms large – can Nvidia sustain this valuation, or is a fall inevitable?
A Reign of Market Dominance for Nvidia
Nvidia’s trajectory to this summit has been paved with the gold of soaring artificial intelligence (AI) demand. The crucial role played by its graphics processing units (GPUs) in cultivating and nurturing AI business frameworks cannot be overstated.
The unparalleled ability of GPUs to conduct myriad calculations concurrently makes them indispensable for AI operations. Clustering GPUs amplifies this capability, enabling the efficient training of vast AI systems and propelling Nvidia’s meteoric ascent over the past eighteen months.
Besides, Nvidia lords over its domain with a substantial lead. The runner-up, Advanced Micro Devices, dabbles in AI but lacks the technological prowess to rival Nvidia.
The surging demand for its flagship product fuelled Nvidia’s trailing-twelve-month revenue surge from roughly $30 billion to a staggering $80 billion in just over a year.
Growth Implications Embedded in Nvidia’s Shares
Yet, much of this prodigious growth is already factored into Nvidia’s stock price.
Although revenue growth lays the foundation for a company’s tomorrow, investors’ hearts are set on earnings. Consequently, metrics like price-to-earnings (P/E) ratio and forward P/E ratio hold considerable weight in stock valuation considerations.
Nvidia presents an intriguing interplay between these metrics. Trading at 72 times trailing earnings and 46 times forward earnings, the stock encapsulates a 59% earnings growth expectation already priced in by investors.
Notwithstanding, sustaining such stellar figures in the future looks increasingly onerous. Nvidia’s year-over-year EPS leap of 629% in Q1 FY 2025 may be the pinnacle, with arduous quarters ahead as the initial GPU rush of last year starts to overlap.
The billion-dollar question lingers: Can Nvidia uphold its $3 trillion evaluation?
Challenges in Maintaining Profit and Revenue Growth for Valuation Sustainment
Microsoft and Apple, the other members of the $3 trillion echelon, have historically traded around 30 times trailing earnings over the past half-decade. While manifestly pricy concerning the broader market, both stand as exemplary entities.
Given Nvidia’s unique standing as a business with robust profit margins and market supremacy, I peg Nvidia at 30 times earnings as a baseline.
To merit a $3 trillion valuation at a 30 times earnings multiple, a company must rake in $100 billion in annual profit. Nvidia’s recent tally reads $42.6 billion over the past twelve months – a considerable march to the targeted profit levels.
Moreover, Nvidia’s history merits scrutiny. Never before has Nvidia enjoyed the profitability it relishes today, with its market supremacy a significant catalyst.
However, a potential uptick in competition looms large. Rising giants now design their own chips to supplant Nvidia’s GPUs. The present marginal prowess may face erosion in the future—especially during a hardware revision cycle.
Accounting for a profit margin dip to 30%, the pre-AI boom levels, Nvidia would need to amass $333 billion in sales to shore up its valuation. While historical profit margins may remain elusive, maintaining current levels faces impediments as robust competition threatens to chisel away margins.
For Nvidia to linger near (or above) the $3 trillion mark, unflagging revenue and profit margins are non-negotiable. A Herculean task awaits, with many contenders eyeing the throne. While Nvidia’s enterprise is unlikely to crumble, its shares may face stress as investors grapple with the ceiling-high anticipations already embedded in the stock.
To Invest or Not to Invest $1,000 in Nvidia?
Before plunging into Nvidia stock, exercise caution:
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Keithen Drury has no position in any of the stocks listed. The Motley Fool holds positions in and endorses Advanced Micro Devices, Apple, Microsoft, and Nvidia. The Motley Fool also suggests the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool honours a disclosure policy.