Wall Street legend Peter Lynch once said, "All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out." That idea is rooted in simple logic: The worst thing a stock can do is fall to zero, but there is theoretically no limit on the upside.
On that note, Nvidia (NVDA 6.18%) and Axon Enterprise (AXON 0.65%) have certainly been big winners over the last two decades, with shares soaring 29,710% and 5,920%, respectively. That means $5,000 invested in Nvidia and Axon in October 2003 would now be worth $1.5 million and $301,000, respectively.
Given their tremendous past outperformance, both growth stocks warrant further consideration regarding their future potential. Here's what investors should know.
1. Nvidia
Nvidia is the chipmaker helping to drive the artificial intelligence (AI) boom. It is best known for inventing the graphics processing unit (GPU), a chip that has become the gold standard in accelerated data center computing. Indeed, the company holds a 95% market share in workstation graphics and machine learning processors, according to analysts, and Forrester Research says Nvidia GPUs are "synonymous with AI infrastructure."
However, Nvidia truly stands apart due to its full-stack strategy. The company has evolved beyond semiconductors and delved into subscription software and cloud services. For instance, DGX Cloud allows businesses to provision supercomputing infrastructure and software for the development of AI applications. Similarly, Omniverse Cloud supports 3D application development, and it serves as a simulation engine for training and testing AI models. Those products address a $300 billion market opportunity.
Nvidia delivered astounding financial results in the second quarter. Revenue soared 101% to $13.5 billion on strong demand for AI products, and non-GAAP earnings increased more than fivefold to $6.7 billion as high-margin software continued to increase as a percentage of total sales.
Growth will undoubtedly slow in the future, but Nvidia has hardly scratched the surface of its $1 trillion market opportunity, and the company is still expanding into new product categories. Reuters reported earlier this week that Nvidia plans to produce PC chips in partnership with Arm Holdings, a move that could deal a blow to Intel.
However, AI will undoubtedly be the largest catalyst for Nvidia in the coming years, and it promises to be a powerful one at that. Morningstar analyst Brian Colello expects Nvidia to grow revenue by 22% annually over the next decade. In that context, its current valuation of 32.8 times sales -- a premium to the three-year average of 23.2 times sales -- looks a little more palatable.
To be fair, Nvidia faces headwinds as well, including competition from other chipmakers and cloud service providers, and the recent expansion of chip export restrictions. All things considered, it would be prudent to wait for a pullback before purchasing shares. But risk-tolerant investors chomping at the bit could buy a very small position in Nvidia stock today.
2. Axon Enterprise
Axon specializes in public safety technology. Its best-known product is the Taser, a conducted energy device (CED) invented by the company and sold as a nonlethal alternative to firearms. But Axon also provides cloud-based software and sensors (body cameras, in-car Fleet cameras) that streamline the capture, storage, management, and analysis of digital evidence for law enforcement and other agencies. Its products ultimately improve efficiency, safety, and transparency for customers.
Axon's market leadership in CEDs has allowed it to build customer relationships with 94% of U.S. law enforcement agencies (and many international organizations). Axon has parlayed that advantage into a leadership position in digital evidence management software, and the company is gaining traction in report-writing software and real-time operations software.
Axon posted solid financial results for the second quarter. Revenue increased 31% to $375 million on strong sales in cloud software, Axon Fleet cameras, and Taser 10 devices, and non-GAAP net income climbed 31% to $84 million. Management also raised its full-year outlook. Guidance (at the midpoint) now calls for a 28% revenue increase in 2023.
Going forward, investors have good reason to believe Axon can maintain a similar growth trajectory. The company already has a strong presence among state and local law enforcement, but it sees room to expand with federal agencies, international organizations, and commercial enterprises. In total, management values its addressable market at $50 billion, which leaves plenty of upside for the company.
On that note, shares currently trade at 11.4 times sales, roughly in line with the three-year average of 11.5 times sales. At that price, investors should feel comfortable buying a small position in this growth stock today.
