If you're wondering why the stock market is back at all-time highs, there's one simple explanation: The "Magnificent Seven."
This is the group of the seven most valuable tech stocks that include Microsoft, Apple, Nvidia (NVDA 6.18%), Alphabet, Amazon, Meta Platforms, and Tesla.
These stocks delivered monster returns last year, and many of them are off to strong starts in 2024, capitalizing on the AI boom and the recovery coming out of the 2022 bear market. Today, Microsoft is the most valuable Magnificent Seven stock and the most valuable company in the world. However, I think we could see a passing of the torch this year. The company that is set to take Microsoft's place? AI superstar Nvidia, which is already dominating the AI chip market and the stock market narrative.
Here are a few of the reasons Nvidia is a good bet to be the most valuable company in the world by the end of the year.
Image source: Getty Images.
1. Nvidia's competition still isn't close
It's no secret that Nvidia has ridden the generative AI boom to record returns. Since the start of 2023, the stock is up by more than 500%, topping a $1 trillion market cap before passing $2 trillion earlier this year.
Its revenue has tripled and its profit is growing even faster, largely because Nvidia sells the vital components to build out the AI models and applications that almost every major corporation sees is betting on. That tech infrastructure relies on Nvidia's graphics processing units (GPUs), and there's been extraordinary demand for them as analysts estimate that the company owns a 98% share of the data center GPU market.
It's true that competition is on the way. AMD launched its MI300 generative AI accelerator in December, but the company's first-quarter guidance indicates that its data center revenue will still be a fraction of Nvidia's.
Competition entering the market doesn't mean it will make a significant dent in Nvidia's lead as Nvidia has technological and structural advantages over its aspiring rivals. Some industry insiders have predicted as much as well.
For example, Matt Wood, a vice president of artificial intelligence products at AmazonWeb Services told The Information, "There's no meaningful competition" for Nvidia, and he was skeptical that AMD or anyone else could pose a significant challenge to the AI chip leader.
If Nvidia can successfully defend its market share against AMD, Intel, and others, the stock should move even higher.
2. Supply will remain constrained
Skeptics believe that Nvidia and other AI stocks are in a bubble, and its bumper profit is temporarily inflated by supply constraints for AI chips. Once that supply crunch is solved, they argue, prices will come down and Nvidia's profit will fall.
However, there's no sign that supply imbalance will resolve itself anytime soon.
Nvidia CFO Colette Kress said on the recent earnings call, "We expect our next-generation products to be supply constrained as demand far exceeds supply," and CEO Jensen Huang elaborated, noting that supply is improving, but added, "We expect the demand will continue to be stronger than our supply."
Huang made another point that's key to understanding the supply demand dynamic in AI chips, saying, "With all of the new products, demand is greater than supply. And that's just kind of the nature of new products."
While competition may fill in supply for less powerful components, demand for cutting-edge technology is likely to continue to be difficult to meet, and that's where Nvidia excels. It should remain the leader in the product category, GPUs, which it invented 25 years ago and has advanced ever since.
3. Nvidia will penetrate new markets
While Nvidia's near-term success will be determined by its data center business, investors shouldn't forget that the company has the ability to move into new markets such as PC chips, which it announced in January, and it's well positioned to capitalize on evolving markets such as autonomous vehicles and the metaverse.
Nvidia's technology has a long history of finding new applications, including digital gaming, cryptocurrency mining, and now AI, but it's a mistake to think that it won't penetrate and dominate new markets as it's done with AI.
The PC chip market presents an attractive opportunity for Nvidia, with tens of billions of dollars of annual revenue available, and Nvidia could turn the tables on AMD and Intel there, taking market share from them in PCs rather than ceding it in AI.
4. Wall Street continues to underestimate Nvidia stock
Nvidia has soared past Wall Street's expectations in each of its past four quarters, showing that analysts continue to underestimate the company's growth and demand for its AI components.
Currently, the average analyst expects Nvidia to generate earnings per share of $24.50, but that number is likely to go up, assuming the company's current momentum continues.
At that valuation, Nvidia is trading at a forward price-to-earnings (P/E) ratio of less than 40, making it not much more expensive than Apple or Microsoft, the two companies it's chasing to gain the title of the top Magnificent Seven stock. Microsoft trades at a P/E ratio of 35, based on estimates for its fiscal year that ends in June, and Apple trades at a forward P/E of 26.
At a market cap of $2.32 trillion, Nvidia's stock price would have to increase 31% to eclipse Microsoft's current level of $3.04 trillion. That kind of gain looks to be within reach for Nvidia, given its dominance of AI chips and the ongoing supply crunch that should support its wide profit margin.
It's no accident that Nvidia stock has skyrocketed in the AI boom. It holds the key to unlocking the power of generative AI, and that seems unlikely to change. As demand grows for AI and the components that make it work, Nvidia should go even higher.
