An investment of just $100 made in shares of Nvidia (NVDA 0.48%) five years ago is now worth about $1,339, which is not surprising as the market has rewarded the chipmaker's impressive growth in revenue and earnings handsomely.
A big chunk of those gains came in 2023, driven by a significant acceleration in Nvidia's growth thanks to the company's dominant position in the market for artificial intelligence (AI) chips and the recent recovery in the personal computer (PC) market, which kick-started the growth of its gaming business.
Even better is that analysts forecast Nvidia will grow at a much faster pace in the next five years compared to the growth it has clocked in the previous half-decade. More specifically, consensus estimates forecast Nvidia's earnings to increase at a compound annual growth rate (CAGR) of 103% over the next five years. That would be more than double the 48% CAGR Nvidia's bottom line has clocked in the past five years.
A closer look at Nvidia's key growth drivers will tell us exactly why its bottom-line growth is expected to step on the gas over the next five years.
NASDAQ: NVDA
Key Data Points
Nvidia's huge catalysts point toward red-hot growth
Nvidia was a much smaller company five years ago. It generated just under $12 billion in revenue in fiscal 2019 (which ended in January 2019 and coincided with 11 months of calendar year 2018). Gaming was Nvidia's biggest business segment at that time, accounting for 53% of its top line, while the data center business produced a quarter of its total revenue five years ago.
The situation has changed dramatically since then. The company now gets 80% of its revenue from selling graphics processing units (GPU) for the data center market. Gaming is now a smaller component, with just under 16% of Nvidia's fiscal 2024 third-quarter revenue. Still, Nvidia is the leader in both of these markets.
According to third-party estimates, Nvidia controls more than 80% of the AI chip market, and it has a similar position in the market for discrete graphics cards that are deployed in PCs. The good news is that both of these markets are built for solid growth over the next five years. According to Nvidia's peer Advanced Micro Devices, the AI chip market could generate annual revenue of $400 billion in 2027, up nearly 10x from this year's $45 billion.
On the other hand, the gaming GPU market is forecast to grow at an annual pace of almost 34% through the end of 2028, according to Mordor Intelligence. The cloud gaming market, which is forecast to clock annual growth of 39% through 2028 and generate annual revenue of $23 billion at the end of the forecast period, could be another catalyst for Nvidia given the company's dominant position in this space.
More importantly, Nvidia has been taking steps to ensure that it remains the leading player in these markets by way of its product development moves. The company has already accelerated its product roadmap in AI chips, and it is reportedly going to make its next-generation gaming cards on a more advanced 3-nanometer (nm) process as compared to the current RTX 40-series processors that are made on a 5nm process.
A smaller manufacturing node should ideally allow Nvidia's new gaming chips to pack more computing power and consume less electricity at the same time. This explains why Taiwan Semiconductor Manufacturing, from whom Nvidia sources its chips, claims that the 3nm chips could boost performance by 15% and lower power consumption by 30% as compared to the 5nm chips.
All this indicates that Nvidia is setting itself up to make the most of the impressive growth in the key end markets that contribute significantly to its business. That's why it won't be surprising to see the company's earnings indeed growing at a much faster pace over the next five years as compared to the past five.
How much upside can investors expect over the next five years?
Nvidia is on track to finish fiscal 2024 with revenue of $59 billion. That translates into a five-year revenue CAGR of 38% using the company's fiscal 2019 revenue of $11.7 billion as the base. For comparison, Nvidia's revenue growth is expected to be much faster over the next couple of years, as the following chart indicates.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts.
The company is expected to generate almost $108 billion in revenue in fiscal 2026. That points toward a three-year revenue CAGR of 58% using the fiscal 2023 revenue of $27 billion as the base. If we assume that Nvidia's annual growth slows down to even 30% in the three fiscal years following fiscal 2026, its top line could hit $237 billion in fiscal 2029.
Nvidia has a five-year price-to-sales ratio of 20. Multiplying that with the company's projected revenue in fiscal 2029 would translate to a market cap of $4.75 trillion. That's nearly 4x of Nvidia's current market cap, indicating that a $100 investment in this hot tech stock could multiply once again in the next five years and make investors richer.
