Nvidia has been on an impressive tear lately, but many investors are concerned about the longevity of Nvidia's current position. It's known to be a cyclical company, so a demand reduction in its GPUs (graphics processing units) is coming, although no one knows when.
With Nvidia trading on much of its future prospects, there isn't much room for error. However, there are two companies that aren't as high-flying as Nvidia and could be worth more than it five years from now.
The two companies? Alphabet (GOOG 1.68%) (GOOGL 1.66%) and Amazon (AMZN 1.52%), which are the fourth- and fifth-largest companies in the world, respectively.
Alphabet
When discussing which company is larger, I'm talking about market capitalization. Market cap is how much a company is worth and can be calculated by multiplying the shares outstanding by the stock price. Nvidia currently holds around a $3 trillion market cap, while Alphabet and Amazon are valued at around $2.3 trillion and $2.1 trillion, respectively. So, if Nvidia stays stagnant, these two would have to grow by 31% (Alphabet) and 45% (Amazon) to catch Nvidia.
Over a five-year span, those aren't unrealistic outperformance rates, so the odds of either company surpassing Nvidia aren't that low.
Alphabet has a strong case of being worth more than Nvidia solely on a valuation basis. I could talk about how Google Gemini is a fantastic generative AI model that is starting to pick up momentum after stumbling out of the gate or how Google Cloud is vital in artificial intelligence (AI) infrastructure. But the argument is far simpler than that.
Currently, Alphabet trades at 24.5 times forward earnings. While this is still more expensive than the broader market's 22.3 times forward earnings (measured by the S&P 500 index), it's still far cheaper than the three larger companies in front of it.
GOOGL PE Ratio (Forward) data by YCharts
With Microsoft and Apple trading at 34 and 33 times forward earnings, respectively, they garner a much higher premium than Alphabet.
While some may argue that this premium is warranted due to recent execution, I'd argue that Alphabet is just as deserving over the long term. If you gave Alphabet a 33 times forward earnings multiple, the company would be valued at $3.08 trillion -- essentially the same size as Nvidia.
NASDAQ: GOOG
Key Data Points
Alphabet doesn't get nearly the respect that some other companies do in today's market. As a result, I think it has a strong case to be worth more than Nvidia in the future, as it isn't trading with lofty expectations built into the stock.
Amazon
Amazon's case isn't as straightforward as Alphabet's. The stock trades at 44 times forward earnings, nearly identical to Nvidia's 45 times forward earnings valuation.
However, I believe Amazon's high valuation is a byproduct of its focus on efficiency. CEO Andy Jassy has been pushing for better operating efficiency since he was promoted to CEO. So far, Amazon excelled in this pursuit.
| Segment | Revenue | YOY Revenue Growth | Operating Income | YOY Operating Income Growth |
|---|---|---|---|---|
| North American | $86.3 billion | 12% | $5 billion | 455% |
| International | $31.9 billion | 10% | $903 million | N/A |
| AWS | $25 billion | 17% | $9.4 billion | 84% |
Data source: Amazon. YOY = Year over year. Note: International was unprofitable last year.
With the impressive improvements in all divisions in a year, his plan is clearly working. However, Jassy isn't done yet. Although these profit levels are the highest they've been since the peak of COVID, Jassy believes there are more gains to be had.
This combination of revenue growth (Amazon grew its revenue by 13% in the first quarter) with margin improvement causes earnings to rise rapidly, making the stock appear cheaper if the stock price doesn't rise by the exact same amount.
NASDAQ: AMZN
Key Data Points
Amazon is a solid business with serious staying power. Because of its track record of execution and solid growth, I think it will be worth more than Nvidia in five years. Nvidia's business comes in waves, and although that's great for peaks, it can hurt it when times aren't so good.
