Nvidia (NASDAQ: NVDA) stock’s generated mind-blowing gains in recent years. Believe it or not, it has doubled in price nearly five times over the last five years (for a total gain of around 2,720%).
Can the stock double again from here given that it now has a market-cap of around $3trn (making it one of the largest companies in the world)? Let’s discuss.
Huge market-cap
A lot of investors today seem to think that because Nvidia now has a market-cap of around $3trn, the stock can’t rise much from here. These investors compare the chip designer to other $3trn market-cap companies like Apple and Microsoft – both of which have much higher revenues than Nvidia – and wonder how it could possibly command a cap of $5trn or $6trn in the future.
I think this is the wrong way of looking at things however.
Incredible growth
Right now, Nvidia’s growing at a spectacular rate due to high demand for its AI chips. This financial year (ending 31 January 2025), revenue and earnings per share are projected to grow 106% and 133% respectively as companies like Amazon, Tesla, and Meta Platforms snap up every Nvidia AI chip they can get their hands on.
I’m not expecting this amazing rate of growth to last forever. But even if growth was a third of that in the years ahead, it probably wouldn’t take long for the Nvidia share price to double.
Share price potential
This year, the consensus earnings per share (EPS) forecast for Nvidia’s $2.84. Let’s assume this is accurate. And then let’s say that the company can grow its earnings by 35% a year for the next three years. That would give us EPS of around $7.00.
Apply a price-to-earnings (P/E) ratio of 35 to that EPS forecast (which I think’s reasonable for this magnificent company) and we get a share price of $245. That’s a little over double the share price today.
Many assumptions
Of course, this calculation’s simplistic in nature and I’ve made a lot of assumptions.
Looking ahead, earnings growth may not be 35% a year. After all, this is a cyclical industry. A lot will depend on AI chip demand from the hyperscalers (Amazon, Google, etc). Looking ahead, demand could dry up. Competitors could also steal market share.
My proposed valuation could also be way off the mark. If earnings growth was below than 35%, the stock could have a much lower P/E ratio in the future.
I’m also ignoring stock dilution from employee compensation. This could impact earnings per share negatively.
One other thing worth mentioning is that I’m not expecting the Nvidia share price to double in a straight line. This is a highly volatile stock and it could easily lose 50% or more of its value before going on to double from current levels.
I’m holding
I definitely see a path to a $6trn market-cap however. So I’ll be holding on to my shares (and buying more on pullbacks).
