It's not a question of if Nvidia (NVDA -0.90%) will be a trillion-dollar stock, just a matter of when. With the stock up 150% in 2021, the chipmaker has a market valuation of just under $850 billion, which puts the symbolic threshold almost within reach.
However, because even the S&P 500 has posted 25% gains this year, or more than double the historical average, the potential for a sharp decline grows increasingly likely. That, too, is a matter of when, not if.
Ignoring, for the moment, the dramatic plunge that occurred at the onset of the coronavirus pandemic last year, the stock market has been on an incredible years-long tear. Since the end of the Great Recession in 2009, the benchmark index has put on quite the performance by more than quadrupling in value and turning a $10,000 investment into one worth over $42,000 today.
A new downdraft will undoubtedly take Nvidia down with it, perhaps delaying the inevitable. Here's what it might look like for the tech stock to have that nine-zero valuation.
It's game on for GPUs
Nvidia is, of course, best known for its graphics cards, or graphics processing units (GPU), which have made immersive, processing-intensive video games possible and remain at the heart of Nvidia's business, generating 45% of total third-quarter revenue.
It's not about to diminish in importance either. First, more people started playing video games during the pandemic, and while many will put their controllers aside as more out-of-home entertainment opportunities open up, many will continue.
Citing the impact gamification among millennials has had on the adoption of a virtual world for gamers, Mordor Intelligence estimates the gaming GPU market will grow at a compound annual rate of 14% through 2026. This suggests that Nvidia, which already has an 83% share of the discrete gaming GPU market, might generate as much as $20 billion annually just in this segment if its sales growth rate keeps its pace.
Nvidia is also using AI to make gaming even better and more immersive. Its deep learning super sampling (DLSS) technology uses AI to take low-resolution images and scale them up to high resolutions for display on high-res screens. Add in a nascent but fast-growing esports industry, along with the growth of its GeForce Now cloud gaming service, and this segment still has plenty of expansion possibilities in store for the future.
Nvidia is about so much more than gaming
The crazy thing about the chipmaker, though, is that gaming isn't even its biggest opportunity. Nvidia has stuck its finger in the pies of artificial intelligence, data centers, and automobiles, too, and those all offer tremendous possibilities.
Chips for data centers, for example, already make billions of dollars each year for Nvidia, with segment revenue soaring 55% year over year in Q3 to $2.9 billion and should grow to become the chipmaker's largest segment by 2025.
Its $7 billion acquisition of Mellanox last year helped position Nvidia as a leading supplier for networking hardware.
The chipmaker is also putting AI to work in the cybersecurity data protection market. Combining its Morpheus framework with its zero-trust BlueField-branded data processing units (DPUs), Nvidia offers a unique level of protection regardless of whether the network is located locally, in the cloud, or in hybrid environments.
The zero-trust platform requires all users to be authenticated, authorized, and validated before gaining access to applications and data.
We haven't even gotten around to Nvidia's Drive AV platform for autonomous vehicles, or Omniverse, the first real-time 3D simulation and collaboration platform. The cryptocurrency market is also taking advantage of Nvidia's processing power. The Nvidia CMP HX (CMP stands for crypto mining processor) is a dedicated GPU for professional crypto mining applications that lacks video output since it's a superfluous feature. The chips also have a lower peak core voltage and frequency for improved mining power efficiency.
Time to ring the register
That's a lot of opportunities to cash in on. Analysts think so, too, and recently upgraded their forecasts to estimate Nvidia will now grow revenue from $16.5 billion in 2021 to $59.4 billion in 2026, a better than 29% compounded annual growth rate. Earnings are expected to grow even faster, or almost 42% annually, to $13 per share.
Yet Nvidia's stock isn't cheap, going for 35 times sales. Maintaining that multiple would put the chipmaker's valuation over the trillion-dollar mark sometime next year, but even halving that only delays it reaching that lofty level till the middle of the decade.
So it's obvious a trillion-dollar Nvidia valuation will happen. Maybe the real question investors should start thinking about is, when does the semiconductor stock become a $2 trillion company?