Over the past ten years, Nvidia's (NVDA 1.05%) stock skyrocketed 13,120%. That gain would have turned a $10,000 investment into more than $1.3 million. The same investment in an S&P 500 index fund would only have grown to $27,000.
Nvidia's stock caught fire as its sales of gaming and data center GPUs soared. Between fiscal 2013 and fiscal 2023 (which ended this January), its revenue rose at a compound annual growth rate (CAGR) of 20% from $4.28 billion to $26.97 billion as its adjusted net income grew at a CAGR of 28% from $728 million to $8.37 billion.
In the past 12 months alone, Nvidia's stock surged roughly 210% as the expansion of the AI market fueled more purchases of its high-end data center GPUs to process machine learning and AI tasks. Most of the top generative AI platforms, including OpenAI's ChatGPT and DALL-E, are currently powered by Nvidia's GPUs.
Image source: Nvidia.
The bulls believe the growth of the AI market, along with Nvidia's continued dominance of high-end gaming GPUs, will drive its stock even higher over the long term. But can it generate even more millionaire-making gains for new investors?
Can Nvidia turn $10,000 into $1,000,000 again?
Nvidia's historic run over the past decade was driven by its accelerating growth and its expanding valuations. On July 19, 2013, Nvidia was only trading at a split-adjusted price of $3.56 per share with an enterprise value of $4.5 billion. That was only 14 times the adjusted EPS it would generate in fiscal 2014, and less than one times that year's total revenue.
At the time, investors weren't too thrilled about Nvidia's prospects because it was engaged in a margin-crushing price war with AMD (NASDAQ: AMD) in the gaming GPU market and losing the smartphone chip market to Qualcomm. It was only generating a tiny sliver of its revenue from its fledgling data center business.
But today Nvidia's stock trades at 63 times forward earnings and 27 times this year's sales. The bears will argue that those valuations were inflated by the recent buying frenzy in AI stocks and are unsustainable over the long term.
Even if Nvidia's valuations hold steady at these high levels, it would take a very long time for it to turn a $10,000 investment into $1 million again. Over the next 25 years, Nvidia would need to grow its top line at a CAGR of 20% to achieve that 9,900% gain -- which would boost its annual revenue from $27 billion in fiscal 2023 to $2.7 trillion in fiscal 2048.
If the AI hype dies down or the market crashes, I believe Nvidia's valuations could easily be halved to a more reasonable 31 times forward earnings and 13 times forward sales. At those lower valuations, it could take at least twice as long -- more than half a century -- to turn a $10,000 investment into $1 million even if it keeps growing at a CAGR of over 20%.
But is Nvidia still a good long-term investment?
That simple math suggests that Nvidia won't repeat its millionaire-making run over the past decade anytime soon. Analysts expect its revenue to continue growing at a CAGR of 37% between fiscal 2023 and fiscal 2026 as the AI market expands, but those high expectations could set it up for a steep drop the moment it drops the ball.
Nvidia established a first-mover's advantage in the high-end data center GPU market, but it could face tougher competition from other chipmakers like AMD and Intel, as well as smaller chip designers like Graphcore, in the near future. Tech giants like Microsoft, Alphabet's Google, and Meta Platforms have also been developing their own AI accelerator chips to reduce or eliminate their dependence on Nvidia.
Those competitive headwinds could make it difficult for Nvidia to maintain its dominance of this growing AI market. Investors only need to look back at AMD's massive gains against Intel in the PC CPU market over the past seven years to see how quickly a complacent market leader can lose its competitive edge.
I'm not saying Nvidia will suffer the same fate as Intel, but I also doubt that Nvidia's 60-year-old founder and CEO Jensen Huang -- the driving force behind its greatest accomplishments -- will still be in charge of the chipmaker when he's 80 or 90. If Huang's successor falls in the trap of cutting costs and implementing big buybacks instead of maintaining its technological lead, Nvidia could certainly lose its luster and become a slow-growth chipmaker.
Nvidia could still be a great long-term investment in the expanding AI and gaming markets, but investors should have realistic expectations about its future. In the near term, its stock price will be driven by all the AI news -- but over the long term, it will need to firmly justify its premium valuations by consistently growing its data center business.
