Keithen Drury, The Motley Fool
·4 min read
Nvidia (NASDAQ: NVDA) made headlines by increasing from a $350 billion company at the start of 2023 to a $2.2 trillion company now. But with all of Nvidia's success, many investors wonder if this is the peak of the mountain, or if there is more in store.
The next great threshold Nvidia has as a stock is crossing the $3 trillion valuation line, something only Apple and Microsoft have done (although Apple sits lower than this point right now). Could Nvidia be a $3 trillion company sometime in 2025? A lot would have to go right.
Nvidia's GPU sales picked up thanks to AI demand
One technological shift investors can point to for Nvidia's astronomical rise: artificial intelligence (AI). Almost every company is developing an AI strategy or rolling out its own AI-powered products. However, creating these models requires extreme computing power.
Nvidia's graphics processing units (GPUs) are often recognized as the best in class for this task, so Nvidia has seen the lion's share of the GPU demand wave over the past year. This caused Nvidia's revenue to triple in multiple quarters from a year-over-year standpoint. But the problem with great success is that it becomes difficult to compare to the following year.
But if Nvidia can maintain (or marginally grow) its current revenue levels, it will still be OK.
In Q1 FY 2025 (ending around April 30), management expects revenue of $24 billion, indicating 234% revenue growth from a year ago. AI demand really picked up after Q1 last year, so the more difficult comparisons will begin next quarter. But with Q2 and Q3 revenue coming in at $13.5 billion and $18.1 billion, respectively, Nvidia's growth rates will continue to look healthy if it can maintain a constant revenue stream of $24 billion throughout FY 2025 (ending January 2025).
Wall Street analysts estimate that Nvidia will be able to generate $110 billion in revenue in FY 2025, so we'll use this as the basis of our analysis to see if Nvidia can become a $3 trillion company by 2025.
Nvidia may reach $3 trillion before too long
When companies are profitable like Nvidia, valuing a company by its sales isn't wise. Instead, investors use a company's earnings per share (EPS) to value it. By dividing a company's stock price by its annual EPS, you get the price-to-earnings (P/E) ratio, a relative metric that describes how expensive a stock is.
Nvidia trades for an incredibly expensive 75 times earnings. But that's not a fair assessment, as the market is a forward-looking machine, and it knows Nvidia will grow this year.
So if we use that $110 billion revenue estimate and Nvidia's last quarterly profit margin of 56%, we can estimate that Nvidia will produce around $61.6 billion in profits. If we divide its $3 trillion market cap (market cap is the number of shares outstanding for a company times its stock price) by its theoretical profits, we get a valuation of 49 times earnings.
That's still an expensive valuation, although it is cheaper than today's levels. If we use FY 2026 estimates of $134 billion, its required valuation premium falls to 40 times earnings, a much more reasonable price.
So to answer the question, Nvidia could be worth $3 trillion by 2025 if it hits analyst estimates; it would just be an expensive stock. But Nvidia's stock has rarely been cheap over the past year, and likely won't get much cheaper moving forward, especially if it continues to post strong growth.
With Nvidia's growth trajectory, it may be able to pass Apple as the second-largest company by then as well!
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, 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.
Will Nvidia Be a $3 Trillion Stock by 2025? was originally published by The Motley Fool
