Will Nvidia Be a Trillion-Dollar Stock by 2025?

Nvidia's (NVDA 2.49%) stock closed at an all-time high of $333.76 on Nov. 29, 2021, which gave the chipmaker a market cap of $834 billion. At the time, Nvidia seemed destined to become a trillion-dollar company.

But after hitting its all-time high, Nvidia's stock shed over a third of its value and its market cap dropped to less than $550 billion. The bulls fled amid concerns about a post-COVID-lockdown slowdown in PC sales, while rising interest rates exacerbated that pain by sparking a sell-off in higher-growth stocks.

Can Nvidia regain its momentum and finally join the twelve-zero club by 2025? Let's examine its upcoming catalysts and challenges to find out.

Image source: Nvidia.

Nvidia could face a cyclical slowdown

Nvidia's stock hit an all-time high last year as its gaming and data center GPU business generated dazzling growth throughout the pandemic.

In the 2022 fiscal year, which ended this January, Nvidia's revenue surged 61% to $26.91 billion as its adjusted earnings per share (EPS) grew 78%. Its adjusted operating margin jumped 640 basis points to 47.2%. It attributed most of that growth to its robust sales of gaming and data center GPUs.

But over the next three fiscal years, analysts expect Nvidia's revenue growth to decelerate as that upgrade cycle cools off. On the bright side, they expect its adjusted operating margin to consistently rise as it benefits from improved scale and pricing power in the GPU market.

Data source: S&P Global Market Intelligence.

If those expectations are met, Nvidia would generate $45.64 billion in revenue with an adjusted EPS of $6.59 in fiscal 2025.

Nvidia currently trades at 16 times its revenue and about 50 times its EPS estimate for fiscal 2023. If Nvidia still trades at those forward valuations at the end of fiscal 2024 and hits the estimates, it would have a market cap of about $730 billion.

However, those valuations would still be too rich for a company that's growing its revenue and earnings in the low teens. Therefore, I think Nvidia's market cap might stay between $500 billion and $700 billion over the next three years as it grapples with a cyclical slowdown in the GPU market.

The near-term headwinds

Investors should take analysts' estimates with a grain of salt, but Nvidia stock likely needs to take a breather after its big growth spurt over the past few years.

In HP's (NYSE: HPQ) latest earnings report, it said its sales of consumer PCs fell 1% year-over-year as it faced tough comparisons to the boost it got from remote work and gaming upgrades during the pandemic. That slowdown doesn't bode well for Nvidia and other PC chipmakers.

Meanwhile, data center operators might buy fewer Nvidia GPUs for AI tasks as the usage of cloud-based services decelerates in a post-lockdown market. Waning interest in cryptocurrencies, many of which have lost value this year as investors have rotated out of riskier assets, will also curb sales of its gaming GPUs and dedicated mining chips.

To make matters worse, Intel (NASDAQ: INTC) plans to disrupt Nvidia and AMD's (NASDAQ: AMD) duopoly in discrete GPUs with its own chips. These new GPUs, which Intel is bundling with its own CPUs, could cause more headaches for Nvidia and AMD as the broader gaming market slows down.

The long-term tailwinds

Those challenges seem daunting, but Nvidia has weathered plenty of cyclical downturns and competitive threats since its public debut in 1999. It also remains the dominant discrete GPU maker with an 81% market share, according to JPR's fourth-quarter numbers, compared to AMD's 19% share.

The gaming and data center markets should also keep expanding over the next few years. The gaming PC market could expand at a compound annual growth rate (CAGR) of 14.9% between 2021 and 2027, according to Report Ocean, while Research and Markets expects the data center accelerator market to grow at a CAGR of 36.7% between 2021 and 2026.

If Nvidia continues to dominate both of those growing markets, its cyclical slowdown could end a lot sooner than expected. Its oft-overlooked automotive chip business -- which generated just 2% of revenue in its latest quarter -- could also gain more traction as the automotive sector gradually recovers and develops new connected and autonomous vehicles.

Look beyond Nvidia's market cap

Nvidia probably won't become a trillion-dollar company by 2025, and investors who were spoiled by its 380% rally over the past three years might be a bit disappointed. However, it's arguably better for Nvidia's stock to cool off now and reset the market's expectations instead of flying off the rails with runaway valuations.

Nvidia's stock might generate much lower returns over the next three years, but investors shouldn't abandon the chipmaker yet. Long-term secular tailwinds could still propel its stock to new all-time highs.