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Nvidia will gain more than $1 trillion in market cap by 2024. Can it surpass Microsoft and Apple again and become the most valuable company in the world?

After gaining 239% in 2023 to become the best performing part of the S&P500, Nvidia (NASDAQ: NVDA) has maintained its momentum so far this year. The stock has nearly doubled – with a market cap of more than $1.1 trillion this year – and 2024 isn’t even halfway through yet.

At the end of 2022, Nvidia was worth $359 billion. And suddenly, less than a year and a half later, it could be worth $3 trillion, more than that Microsoft And Apple in terms of market capitalization.

At the rate its shares are rising, Nvidia is on track to achieve this feat by the end of the year. But no growth stock rises in an almost straight line forever. Let’s take a look at what it would take for Nvidia to slow down, and even if it does, why it could still take pole position as the most valuable company in the world.

A large data center.

Image source: Getty Images.

Check all the boxes

One look at Nvidia’s price chart over the past few years, and it’s hard to argue that the stock isn’t overvalued. It looks like yet another case of a stock that has risen too much, too quickly and is ready for a sell-off. And maybe that’s true.

However, Nvidia has risen (mostly) for the right reasons. The size of the run-up may be overstated, but Nvidia checks all the boxes growth investors are looking for. And if the story is this good, the only thing keeping a stock from rising is valuation.

A hockey stick graph, or hockey stick curve, resembles flat growth and then a sharp, ascending line to the right that illustrates breakneck growth. Nvidia’s revenue and net income show this pattern in spades.

NVDA Revenue Chart (TTM).NVDA Revenue Chart (TTM).

NVDA Revenue Chart (TTM).

Nvidia converts almost $0.50 of every dollar of sales into net profit – not gross profit or operating income, but net profit. That’s an incredible feat, especially at the scale at which Nvidia is doing it.

Nvidia also has extremely high operating margins – higher than any other “Magnificent Seven” company – a term referring to large, leading growth stocks Microsoft, Apple, Nvidia, Alphabet, Amazon, MetaplatformsAnd Tesla.

Graph of NVDA Operating Margin (TTM).Graph of NVDA Operating Margin (TTM).

Graph of NVDA Operating Margin (TTM).

To top it all off, Nvidia has a net cash position on its balance sheet. In fact, it’s making money on its cash, generating over $600 million in interest income over the last twelve months.

Graph of NVDA's net total long-term debt (quarterly).Graph of NVDA's net total long-term debt (quarterly).

Graph of NVDA’s net total long-term debt (quarterly).

This is what checking all the boxes looks like. But the question is how long can Nvidia continue to grow at this pace?

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Leading a revolutionary market

Sustained stock market rallies are not always smoke and mirrors. In the case of Nvidia, the company has done a phenomenal job of monetizing its computing power across industries. If you look back at Nvidia’s annual reports from a few years ago – or better yet – five years ago, you’ll notice that the company looked almost nothing like it does today.

Nvidia’s largest market used to sell graphics processing units (GPUs) for gaming, personal computers and data visualization. All of these applications involve huge data sets that need to be visualized and analyzed, and require enormous computing power. These are still profitable and growing business segments for Nvidia, but they don’t make or break the company as they have in years past.

The crypto industry figured out that Nvidia’s GPUs were great for mining (which is what blockchain networks use to confirm transactions and put new coins into circulation). This capability further expanded the end-use scenarios for the product offering.

Nvidia’s products are also useful for increasingly advanced cars and help support electric vehicles.

But the value of these use cases pales in comparison to what Nvidia’s GPUs were seemingly born for: processing massive data sets and compiling data center simulations to meet customers’ artificial intelligence (AI) needs. The change didn’t happen overnight, but product improvements and technology breakthroughs have positioned Nvidia as a leader in AI as it makes the products that require complex AI models.

In 2024, Nvidia’s computing and networking segment represented more than 77% of the segment’s revenue and 85% of its operating income. The reason Nvidia’s stock price is unrecognizable from a few years ago is because Nvidia (the company) is unrecognizable too.

The best bull case for Nvidia is that it is a rally supported by fundamentals and a multi-decade growth industry. If AI adoption continues, it stands to reason that Nvidia will continue to see increased demand.

Four challenges worth considering

As good as Nvidia’s business looks today, I think there are four key challenges investors should consider before buying the stock.

The first is competition. Nvidia is vulnerable to losing market share even as its overall market opportunity continues to expand.

The second is that AI adoption is slowing. Right now, companies are investing in AI, which is a boon for Nvidia’s business. But ultimately they will have to recoup those investments. Investing in AI and monetizing AI are two completely different things. For example, AdobeWall Street’s recent results disappointed Wall Street and sent stocks plunging. Adobe is investing heavily in AI and seeing great results and product improvements, but it has been expensive and hurting short-term earnings results, testing investors’ patience. That’s not exactly good news for Nvidia, as Adobe is a major customer.

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The third concern, which is related to the second, concerns the cyclicality of the chip industry. Nvidia is not a software-as-a-service company with consistent inflows; it sometimes experiences huge peaks in orders, followed by order drops. Meta Platforms plans to spend $10 billion on Nvidia GPUs by the end of 2024. That’s a huge purchase, not an annual expense.

This rapid increase in sales, followed by a decline in growth, is reflected in analyst consensus projections for earnings per share (EPS), which call for earnings per share (EPS) of $24.98 in fiscal 2025, followed by earnings per share of $32.10 in fiscal 2026. Nvidia earned $11.93 in earnings per share in fiscal 2024, implying that earnings per share would more than double in fiscal 2025 but then slow and would grow less than 30% in fiscal year 2026.

That brings me to the fourth concern: appreciation. Nvidia has a sky-high price-to-earnings ratio of 79, but due to expected growth, the forward price-to-earnings ratio is a much more reasonable 37.6. That gives Nvidia a lower price-earnings ratio Costco Wholesale This illustrates that rapid earnings growth can make a seemingly expensive stock look more affordable. But that future price-earnings ratio will only exist if Nvidia lives up to analysts’ high expectations. Still, anything close to these estimates would be a big win and could drive the stock higher. That’s not really the concern. The bigger risk is what comes next. So much growth in so little time could open the door to a slowdown.

Let’s say Nvidia is up another 50% by the time its fiscal 2024 results are out and hits consensus estimates. At that time, the company would be worth more than $3.5 trillion. And assuming Microsoft and Apple cancel, Nvidia would become the most valuable company in the world. But the share would also have a price/earnings ratio of around 56. And with growth only expected to be 30%, investors may realize that’s simply too high a price to pay, even for a great company.

A bad setup

I could see Nvidia pushing the boundaries of a $3 trillion market cap if investors get enamored with fiscal 2024 growth. But the problem is that the stock is somewhat primed to fail in the next three to five years, given the short-term growth. will make its comparisons much more difficult in fiscal year 2026 and beyond.

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Combine that background with uncertainty, the cyclicality of the chip industry and unforeseen challenges, and the risk simply outweighs the reward.

To consider buying Nvidia, I would have to see the valuation make more sense over a multi-year time horizon. If growth slows and falls out of favor, Nvidia could look very cheap. But for now, it’s just too exciting a story that seemingly can do no wrong.

Ultimately, I think Microsoft retains its crown as the most valuable company simply because it has a more rinse-and-repeat, less cyclical business model that spans a variety of end markets. It also has a high margin and plenty of cash to generate dividends, buy back shares and make strategic acquisitions.

Nvidia has what it takes to gain another $1 trillion in market cap, but there are too many question marks beyond that outlook to consider buying the stock now.

Should You Invest $1,000 in Nvidia Now?

Consider the following before buying shares in Nvidia:

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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Adobe, Alphabet, Amazon, Apple, Costco Wholesale, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Nvidia will gain more than $1 trillion in market cap by 2024. Can it surpass Microsoft and Apple again and become the most valuable company in the world? was originally published by The Motley Fool

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