Buying and holding great companies for a long time is one of the best ways to make money in the stock market as this strategy allows investors to compound their investment, and also gain from secular growth trends or disruptive innovation that the companies they invest in may benefit from.
For instance, a $10,000 investment in the Nasdaq Composite index a decade ago is now worth $39,000. However, finding individual stocks that could turn $10,000 into a million dollars in the long run isn't an easy task. A stock will have to jump 100-fold to achieve this feat. In other words, the stock you picked will have to clock a compound annual growth rate of 20% for 25 consecutive years to appreciate this much. That's tough.
However, let me highlight one stock that has achieved this milestone in an even shorter period -- Nvidia (NVDA -0.93%). A $10,000 investment made in Nvidia stock a decade ago is now worth almost $1.2 million.
The company now has a market cap of $1.18 trillion. A 100x jump from here means that Nvidia's market cap could hit $118 trillion. The global economy's size is expected to hit $105 trillion this year, which makes another 100x jump at Nvidia look like a fantasy.
But that doesn't mean investors looking to achieve big gains should not invest in this chipmaker. Let's look at the reasons why.
Understanding how Nvidia has multiplied 100-fold in the past decade
Nvidia's eye-popping surge over the past decade has been driven by outstanding growth in the company's revenue and earnings, which is evident from the chart below.
NVDA Revenue (TTM) data by YCharts
During this time, the company has witnessed a rapid expansion in the application of the graphics cards that it sells. Nvidia's graphics cards were primarily deployed in gaming PCs (personal computers) and workstation PCs a decade ago. Its chips were also gaining traction in the automotive and high-performance computing markets at that time. However, the size of these markets was way smaller as the company delivered annual revenue of $4.1 billion in fiscal 2014.
Cut to the present, and Nvidia is set to finish fiscal 2024 with an estimated revenue of almost $59 billion (based on its revenue guidance of $20 billion for the current quarter). In simpler words, Nvidia's top line has multiplied by 15 in the past 10 years. The company's non-GAAP net income stood at $588 million in fiscal 2014. For comparison, Nvidia has generated almost $20 billion in non-GAAP net income in the first nine months of fiscal 2024.
The company's data center business has been the biggest driver of Nvidia's terrific growth, accounting for 80% of its top line in the previous quarter. This segment has benefited from the explosive demand for the company's artificial intelligence (AI)-focused graphics cards, which come with steep price tags and reportedly command a waiting period of up to a year. More importantly, the market for AI GPUs is going to unlock the next big growth opportunity for Nvidia over the next decade. Here's why.
Meet Nvidia's next big growth driver
Nvidia is the biggest seller of chips deployed in AI servers for training large language models such as ChatGPT. Analysts estimate that the company controls 80% of this market right now, leaving competitors such as AMD and Intel way behind. For instance, AMD expects just $2 billion in revenue from sales of AI chips in 2024. Nvidia, on the other hand, reportedly sold half a million of its AI chips last quarter, which sent its data center segment's revenue up 279% year over year to $14.5 billion.
Given that Nvidia is expected to triple the output of its flagship H100 AI graphics card in 2024, the company may be able to generate $45 billion to $60 billion in revenue from the sale of this chip alone. So, there is a solid chance that the company is likely to maintain its hegemony over the lucrative AI chip market, which is expected to generate $400 billion in revenue in 2027.
If we assume that Nvidia's competitors pull up their socks, introduce competitive products, and reduce its share of the AI chip market to 50% after five years, even then the company could generate $200 billion in revenue from this space. That would be more than triple the revenue Nvidia is on track to generate in the current fiscal year, and that too from one segment alone.
One Wall Street analyst is even more optimistic. Vijay Rakesh of Mizuho predicts that Nvidia could generate $300 billion in AI-related annual revenue by 2027 by maintaining a 75% share of the AI chip market. That would be more than 10 times the revenue Nvidia generated in its most recent fiscal year.
Investors shouldn't miss these additional catalysts that could help the stock multiply
While the data center business has been in the spotlight thanks to AI, Nvidia isn't a one-trick pony. The company has other notable catalysts that could add more fuel to its growth, such as digital twins and cloud gaming.
For instance, Nvidia sees a $150 billion revenue opportunity in the digital twin market in the long run thanks to the growing adoption of this technology in factories and other industrial applications. The company has already started capitalizing on this market by striking deals with big automakers such as Mercedes-Benz and BMW, which will be using Nvidia's GPUs and software to virtually design factories before beginning physical construction.
Meanwhile, the cloud gaming market looks set to become another important growth driver for Nvidia in the long run. The company is the dominant force in this nascent space with a solid market share, which is likely to translate into a substantial jump in its revenue.
In all, it is not surprising to see why analysts are anticipating Nvidia's earnings to increase at a compound annual growth rate of 113% over the next five years. That's substantially higher than the 48% annual earnings growth Nvidia has clocked in the past five years.
Assuming Nvidia's earnings increase at a relatively conservative pace of 50% over the next five years (nearly half of what analysts are projecting), its earnings could jump to $93 per share after five years (using the current fiscal year's projected earnings of $12.29 per share as the base). Multiplying the projected earnings with Nvidia's five-year forward earnings multiple of 42 points toward a stock price of $3,900 per share after five years. That would be an eight-fold jump from current levels.
That's why if you have $10,000 in investible cash after paying your bills, clearing your high-interest loans, and saving enough for a rainy day, buying Nvidia could turn out to be a smart move as this tech stock has the capability of delivering outstanding gains in the long run -- even if it doesn't make you a millionaire -- and could give your portfolio a massive boost.
