Nvidia (NVDA 3.17%) has been a hot stock in 2021 as shares of the graphics card specialist have shot up around 135%, eclipsing bigger names such as Apple (AAPL 0.38%). Thanks to its terrific rally, Nvidia now has a market capitalization of just over $766 billion.
Apple, on the other hand, has a market cap of $2.5 trillion, making it a much bigger entity than Nvidia despite the iPhone maker's underperformance on the stock market in 2021. However, it is worth noting that Nvidia's market cap has increased at a much faster pace than Apple's over the past five years. Let's see why this has been the case.
NVDA Market Cap data by YCharts
Nvidia's faster growth gives it an edge over Apple
The growing demand for graphics cards used in data centers and gaming personal computers (PCs) has supercharged Nvidia's top and bottom lines over the past couple of years. Meanwhile, Apple is benefiting big time from the rapid adoption of 5G smartphones. This is evident from the massive growth in Nvidia and Apple's revenue in fiscal 2021.
|
Revenue |
FY 2020 |
FY 2021 |
FY 2022 (Estimate) |
FY 2023 (Estimate) |
|---|---|---|---|---|
|
Apple |
$274.5 billion |
$365.8 billion |
$381.3 billion |
$401.8 billion |
|
Year-over-year growth |
5.5% |
33% |
4.2% |
5.4% |
|
Nvidia |
$10.9 billion |
$16.7 billion |
$25.8 billion |
$29.1 billion |
|
Year-over-year growth |
(7)% |
53% |
55% |
13% |
Source: Annual earnings reports and Yahoo! Finance. FY = Fiscal Year
However, as noted in the table, Nvidia is expected to maintain stronger growth levels over the next couple of fiscal years. Analysts expect the chipmaker's earnings to clock a compound annual growth rate of more than 32% for the next five years, while Apple's earnings are expected to grow at a slower annual rate of 15%.
Why Nvidia could keep growing at a faster pace than Apple
Nvidia dominates the graphics card market. Jon Peddie Research estimates that its share of the discrete GPU (graphics processing unit) market stood at 83% in the second quarter of 2021. Market research firm Omdia points out that Nvidia's share of the cloud and data center GPU market was over 80% in 2020.
This puts Nvidia in a solid position to grow its revenue and earnings at a quick pace in the future. That's because the discrete GPU market is expected to hit $54 billion in revenue by 2025, compared to $23.6 billion in 2020. Other third-party research points out that the data center GPU market is expected to grow at an annual rate of 43.5% through 2026, and hit $26.2 billion in revenue.
Image source: Getty Images.
Nvidia's dominance in both these markets means that the company could add billions of dollars to its revenue in the coming years. Apple is also sitting on a nice catalyst in the form of 5G smartphones. The company saw a nice spike in iPhone unit volumes in the third quarter of 2021. Market research firm IDC says that Apple shipped 50.4 million iPhones in the third quarter, up from 41.7 million units in the year-ago period. The company stood second in the global smartphone rankings in Q3 with a market share of 15.2%.
Apple is making more money per iPhone in the 5G era -- its average selling price (ASP) increased sharply in the fourth quarter of fiscal 2021, which ended on Sept. 25, 2021. Based on IDC's shipment data and Apple's iPhone revenue figures from its quarterly reports, the iPhone ASP increased 21.6% year-over-year in the fiscal fourth quarter to $771.
However, cheaper offerings from Chinese competitors are expected to bring down the ASP of a 5G smartphone. IDC forecasts that the ASP of a 5G smartphone could drop to just $404 by 2025 from this year's estimate of $634. This could dent the improved pricing power that Apple is currently enjoying in 5G smartphones. Additionally, Apple isn't as dominant as Nvidia in the smartphone space, as it competes with the likes of Samsung, Xiaomi, and other Chinese companies that have cornered much bigger shares of the market.
Meanwhile, Nvidia enjoys strong pricing power in the lucrative GPU market since it has an iron grip over this space, which is allowing the company to command a premium over rival AMD's offerings.
Could Nvidia become more valuable than Apple by 2026?
It wouldn't be surprising to see Nvidia outpace Apple's growth. Apart from the video game and data center markets that are driving impressive growth for Nvidia, it also stands to gain from other areas such as self-driving cars, the metaverse, and cloud gaming, among others. But Apple is likely to face resistance from competitors and its growth may not be as great as Nvidia's.
So if Nvidia's earnings grow at more than 32% a year for the next five years, it could generate $16.93 in earnings per share at the end of the forecast period based on this year's estimated earnings of $4.13 per share. Nvidia is trading at 106 times earnings right now. Assuming the same price-to-earnings ratio after five years, Nvidia's stock price would be closer to $1,800 -- a six-fold jump over its current stock price of nearly $300 -- which points toward $4.5 trillion in market cap in 2026.
Apple's projected annual earnings growth of 15.4% for the next five years would send its earnings to $11.74 per share at the end of the forecast period. Apple is trading at 26 times earnings now, and a similar multiple in 2026 would translate into a stock price of $305. So its stock is expected to double in the next five years, which means that it could have a market cap of nearly $5 trillion at the end of 2026.
It's probable that Apple could remain more valuable than Nvidia in 2026. But Nvidia's market capitalization is likely to increase by a much bigger margin, which makes it a more attractive option for investors in the hunt for a growth stock.
