The US has been the birthplace of the world’s largest corporations for more than a century. The economy has seen a constant changing of the guard, with different industries taking turns in creating the most value:
- United States steel became the world’s first $1 billion company in 1901.
- Automobile construction progressed General Motors to the world’s first $10 billion valuation in 1955.
- industrial conglomerate General Electric became the world’s first $100 billion company in 1995.
- Finally a tech giant Apple became the world’s first $1 trillion company in 2018.
Technology remains the most important value creator today
Apple has since joined Microsoft, Amazonand Google Parents alphabet in the $1 trillion club. But there’s another potential newcomer knocking on the door.
Nvidia (NVDA 2.54%) is the world’s leading manufacturer of advanced semiconductors, particularly those designed for emerging technologies such as artificial intelligence (AI). Following the release of a landmark earnings report for the first quarter of fiscal 2024 (ended April 30), Nvidia stock soared 24%, taking its market cap to $940 billion.
That means it could be on the verge of breaching the stock market’s most exclusive valuation threshold. But over the long term, I think Nvidia has the potential to grow well past just $1 trillion. Here’s a closer look at why I believe that.
Artificial intelligence is at the core of Nvidia’s business
Although the AI boom doesn’t seem to have started until 2023, Nvidia CEO Jensen Huang has been discussing the potential of the technology for years. In fact, he personally delivered the first AI supercomputer to OpenAI in 2016, and Nvidia’s chips have been responsible for training its large language model, ChatGPT, ever since.
Now every major cloud computing service provider — from Microsoft to Google — demands Nvidia’s GPUs in their data centers to enable their millions of business customers to access AI. In the first quarter, Huang said there is $1 trillion in existing data center infrastructure that needs to be upgraded to accelerated computing to apply technologies such as generative AI.
Guess what? Nvidia has an estimated 90% market share in this segment. The company said it is now working to rapidly increase supply of its entire family of data center chips “to meet rising demand.”
But Nvidia doesn’t just dominate the data center when it comes to AI. The company’s automotive segment is home to its Drive platform, a hardware and software solution for automakers looking to add fully autonomous self-driving capabilities to their new vehicles. His customers include traditional brands such as Mercedes Benzand promising electric vehicle newcomers such as noo.
In the first quarter, Nvidia’s automotive sales doubled year over year to $296 million, but there was even bigger news: Its sales pipeline grew to $14 billion, up from $11 billion a year earlier.
Nvidia beat Wall Street expectations in the first quarter
Wall Street analysts expected Nvidia to post first-quarter revenue of $6.5 billion and non-GAAP earnings per share of $0.92. The company topped those numbers with sales of $7.2 billion and earnings per share of $1.09.
Earnings were driven by the data center segment, which posted record quarterly revenue of $4.2 billion compared to an expected $3.9 billion. Nvidia’s CFO said rising demand for chips related to generative AI and big language models underpins the data center segment’s strong performance (no surprises).
But the real thrill was the company’s future prospects. Nvidia expects second-quarter revenue to come in at a whopping $11 billion — not only is that higher than Wall Street’s forecast of $7.2 billion, but it would also be Nvidia’s highest quarterly revenue result in its Story.
Image source: Getty Images.
The stock market is a future-oriented machine
To be clear, Nvidia stock is expensive today by nearly every traditional valuation metric. Based on non-GAAP earnings per share of $3.06 over the trailing 12 months, the price-to-earnings (P/E) ratio is currently 124. That’s four times the average P/E of other large tech companies Die Nasdaq-100 The index is currently trading at just 28 times earnings.
But investors are always looking ahead, and artificial intelligence estimates are stunning even at the low end. McKinsey & Company projects that 70% of all businesses will be using AI by 2030, leading to an additional $13 trillion in global economic activity. Cathie Woods Ark Investment Management puts that figure at a staggering $200 trillion.
Even if the actual result falls somewhere in the middle, AI has the potential to be the greatest value creator in history. And as I mentioned, Nvidia has a 90% market share in AI chips, so almost any company developing this technology will be doing so on top of their hardware.
Nvidia stock needs to climb a little over 6% for the company to join Apple, Microsoft, Amazon, and Alphabet in the $1 trillion club, so that seems like a foregone conclusion. But in the long run, it actually has the potential to surpass all of those names and become the largest company in the world.
Suzanne Frey, an executive 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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Microsoft, Nio, and Nvidia. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.