The U.S. has been the birthplace of the world's largest companies for more than a century. The economy has experienced a consistent changing of the guard, with different industries taking turns at creating the most value:
- United States Steel became the world's first $1 billion company in 1901.
- Car manufacturing drove 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, technology giant Apple became the world's first $1 trillion company in 2018.
Technology remains the leading value creator today
Apple has since been joined by Microsoft, Amazon, and Google parent Alphabet in the $1 trillion club. But there's another potential entrant knocking on the door.
Nvidia (NVDA 6.18%) is the world's leading producer of advanced semiconductors, especially those designed to power new technologies like artificial intelligence (AI). After delivering a blockbuster earnings report for the fiscal 2024 first quarter (ended April 30), Nvidia stock soared 24%, taking its market capitalization to $940 billion.
That means it could be about to cross the most exclusive valuation threshold in the stock market. But I think Nvidia has the potential to grow well beyond just $1 trillion over the long term. Here's a closer look at why I believe that.
Artificial intelligence is at the core of Nvidia's business
Although the AI boom seems to have only started in 2023, Nvidia CEO Jensen Huang has discussed the potential of the technology for years. In fact, he personally delivered the first AI-dedicated supercomputer to OpenAI in 2016, and Nvidia's chips have been responsible for training its ChatGPT large language model ever since.
Now, every large provider of cloud computing services -- from Microsoft to Google -- is demanding Nvidia's GPUs in its data centers to give their millions of business customers access to AI. In Q1, Huang said there is $1 trillion worth of existing data center infrastructure that needs to transition to accelerated computing to apply technologies like generative AI.
Guess what? Nvidia has an estimated 90% market share in that very segment. The company said it's now working to rapidly increase supply of its entire family of data center chips "to meet surging demand."
But Nvidia isn't just dominating the data center when it comes to AI. The company's automotive segment is home to its Drive platform, which is a hardware and software solution for car manufacturers wanting to install fully autonomous self-driving capabilities into their new vehicles. Its customers include legacy brands like Mercedes Benz, and promising electric vehicle upstarts like Nio.
In Q1, Nvidia's automotive revenue more than doubled year over year to $296 million, but there was bigger news: Its revenue pipeline grew to $14 billion, up from $11 billion a year ago.
Nvidia crushed Wall Street's expectations in Q1
Wall Street analysts expected Nvidia to deliver $6.5 billion in revenue and $0.92 in non-GAAP earnings per share in Q1. The company blew those numbers away with $7.2 billion in revenue and $1.09 in earnings per share instead.
The result was driven by the data center segment, which generated record quarterly revenue of $4.2 billion compared to $3.9 billion expected. Nvidia's CFO said increasing demand for chips related to generative AI and large language models underpinned the data center segment's strong performance (no surprises there).
But the real kicker was the company's future guidance. Nvidia expects its second-quarter revenue to come in at a whopping $11 billion -- not only is that above the $7.2 billion Wall Street predicted, but it would be Nvidia's highest quarterly revenue result in its history.
Image source: Getty Images.
The stock market is a forward-looking machine
Let's be clear: Nvidia stock is expensive today when measured against nearly all traditional valuation metrics. Based on the company's $3.06 in trailing-12-month non-GAAP earnings per share, its price-to-earnings (P/E) ratio is currently 124. That's four times the average P/E ratio of other large tech companies, given the Nasdaq-100 index trades at a P/E of just 28 right now.
But investors always look ahead, and the estimates surrounding artificial intelligence are staggering, even at the low end. McKinsey & Company thinks 70% of all companies will use AI by 2030, creating $13 trillion in additional global economic activity. Cathie Wood's Ark Investment Management places that number at a mind-boggling $200 trillion.
Even if the true result falls somewhere in the middle, AI will have the potential to be the greatest value creator in history. And as I touched on earlier, Nvidia has a 90% market share in AI chips, so almost every company developing the technology will be doing so on top of its hardware.
Nvidia stock needs to rise a little over 6% for the company to join Apple, Microsoft, Amazon, and Alphabet in the $1 trillion club, so it seems like a foregone conclusion. But over the long term, it genuinely has the potential to surpass all of those names to become the largest company in the world.
