If one topic has dominated the conversation since early last year, it's artificial intelligence (AI). Recent advances in the field have surfaced a host of new opportunities to improve productivity, generate new content, and streamline processes.
Indeed, six of the top seven companies in the world -- when measured by market cap -- have one thing in common: They have embraced the potential of generative AI and are moving quickly to profit from these next-generation algorithms. Topping that list is Microsoft, the only company that currently sports a market cap of more than $3 trillion.
One company that seems destined to join the ranks of the $3 trillion club is Nvidia(NASDAQ: NVDA). The maker of graphics processing units (GPUs) only recently joined the elite fraternity of companies with a $2 trillion market cap, but seems ordained to climb to greater heights.
Let's look at the multiple growth drivers that could combine to send Nvidia stock higher, and what it will take to achieve this lofty benchmark.
Image source: Getty Images.
A (not so) secret weapon
Nvidia has long been known for creating the chips that generate lifelike images in video games. This is the result of its pioneering work in parallel processing, or the ability of its GPUs to process a multitude of mathematical calculations simultaneously by breaking the job up into smaller pieces and running them concurrently. The company quickly realized the vast potential of this process and worked to adapt the technology to other applications.
Since then, Nvidia GPUs have been used to power AI, zip data through the cloud, run data centers, enable autonomous driving, and more.
A track record of impressive growth
Over the past decade, Nvidia's revenue has grown by 1,900% (as of this writing), while its net income has surged 9,500%. While this hasn't been in a straight line, the company's performance has been consistent, fueling epic growth in its stock price, which has soared 20,500%.
In the company's fiscal 2024 (ended Jan. 28), Nvidia's results set new records across the board. Revenue grew 126% year over year to $60.9 billion, while fiscal discipline drove diluted earnings per share (EPS) up 586% to $11.93. The results were fueled by unprecedented demand in its data center segment, which includes processors used for AI, cloud computing, and data centers. CEO Jensen Huang left no doubt as to the future potential: "Accelerated computing and generative AI have hit the tipping point."
Even more compelling is the company's 2025 first-quarter outlook, which is guiding for revenue of $24 billion. This would represent growth of 190% year over year.
It's still early days for the adoption of AI, but there's no denying the magnitude of the opportunity. Analysts at Goldman Sachs Research estimate the economic impact at $7 trillion by 2030. Furthermore, we don't yet know how the evolution of AI will unwind, but most experts suggest the trend will only accelerate from here. As the leading provider of GPUs used for AI, Nvidia stands to reap the windfall from these secular tailwinds.
Multiple growth drivers
While much of the focus is on AI, there are a number of other opportunities that could drive Nvidia higher.
Chief among those is the gaming market. Many veteran and novice gamers upgraded to the latest and greatest processors during the pandemic. That, combined with the subsequent economic downturn, cratered demand for graphics cards in recent years. However, those gaming chips and the computers that house them are coming to the end of their useful life, which will act as a catalyst for the next upgrade cycle.
To close out 2023, Nvidia controlled an estimated 80% of the discrete desktop GPU market, and its graphics cards are still the gold standard for gamers. Demand is expected to surge over the next five years, climbing from $2.7 billion in 2023 to $11.7 billion by 2028, a compound annual growth rate (CAGR) of 34%, according to Mordor Intelligence. The market for gaming chips has already begun to rebound, a trend that favors Nvidia.
Let's not forget the data center market, driven by the digital transformation. Many businesses are moving their data from on-premises to the cloud, another trend that benefits Nvidia. The company controls an estimated 95% of the market for data center GPUs, according to Angelo Zino, senior equity analyst at CFRA Research. The data center market is expected to grow from $302 billion in 2023 to $622 billion by 2030, a compound annual growth rate of 11%, according to Prescient and Strategic Intelligence Market Research.
The combination of Nvidia's dominance and the increasing market size puts Nvidia at the intersection of another opportunity.
Nvidia has long dominated the machine learning market, an established field of AI that's creating self-teaching algorithms. Nvidia controls an estimated 95% share of the market, according to data provided by New Street Research. It's little wonder then that those in the market for AI-centric GPUs are turning to Nvidia.
How it gets there from here
Nvidia's currently boasts a market cap of roughly $2.26 trillion, which means it will only take a stock price move of 33% to drive its value to $3 trillion. Given the company's multiple avenues for growth and the accelerating adoption of AI, it seems it's only a matter of time.
Given its meteoric rise over the past 17 months, any shortfall -- real or imagined -- in Nvidia's performance could crater the stock price, at least temporarily. That said, 36 times forward earnings is a reasonable price to pay for a company at the forefront of one of the biggest technological shifts in a generation, making Nvidia stock a buy.
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Danny Vena has positions in Microsoft and Nvidia. The Motley Fool has positions in and recommends Goldman Sachs Group, 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.
