Buying and holding solid companies for a long time is a tried and tested method of succeeding in the stock market. This strategy allows investors to capitalize on secular growth trends and also compound their investments. And Nvidia (NVDA +0.64%) is a prime example of how this philosophy has helped people become millionaires in the past decade.
If you bought $5,000 worth of Nvidia stock a decade ago, your investment would now be worth a whopping $1.22 million.
So, anyone who was a decade away from retirement at that time would be able to retire as a millionaire right now assuming they bought $5,000 worth of Nvidia then. Expecting Nvidia to deliver such terrific returns over the next decade doesn't seem possible right now considering its market cap of close to $3 trillion.
However, Nvidia remains a top growth stock to buy in light of its solid prospects. Assuming you're at least a decade away from retirement this semiconductor stock could easily find a spot in a diversified million-dollar portfolio. Let's look at the reasons why.
Nvidia's move to be omnipresent in AI could pay off remarkably in the long run
Artificial intelligence (AI) has been the driving force behind the massive surge in Nvidia's stock since the end of 2022. That's when ChatGPT burst onto the scene, and it emerged that the chatbot was trained using the chipmaker's A100 graphics processing units (GPUs). Since then, major cloud computing players, tech giants, and even governments have been lining up to get Nvidia's hardware.
Nvidia commands more than 80% share of the AI chip market as per analysts, leaving very little business for rivals in this fast-growing market. More importantly, Nvidia is trying to ensure it becomes a one-stop shop for anyone looking to use AI technology. From training AI models in data centers to running inference applications to offering software to customers to help them develop custom AI applications, Nvidia is leaving no stone unturned to capitalize on the lucrative revenue opportunity in the AI market.
NASDAQ: NVDA
Key Data Points
For instance, Nvidia management said during the recent earnings conference call that 40% of its data center revenue in the past four quarters has come from AI inference applications. Inference is the process of feeding the already trained AI models with new data so that they can derive conclusions from larger database. In simpler words, putting the trained AI model into real-world use is known as inferencing.
So, Nvidia has managed to build a solid position for itself in both the AI training and inferencing markets. As a result, the company is well placed to make the most of the AI chip market that is expected to clock annual revenue of $341 billion by 2033. However, Nvidia believes that its data center opportunity is much bigger.
CEO Jensen Huang predicts that the company is on track to benefit from the upgrade of "$1 trillion worth of data centers from general-purpose computing to accelerated computing." Given that the company has generated $96 billion in revenue in the past four quarters, Huang's forecast suggests that it barely scratched of the end-market opportunity.
Meanwhile, the company has also targeted the multibillion-dollar opportunity in the AI software market. In March 2023, the company launched the Nvidia AI Foundations service for enterprises looking to build, finetune, and operate custom large language models (LLMs) and generative AI models for their use cases. As this is a cloud-based service, enterprises won't have to invest in expensive infrastructure such as graphics cards.
Nvidia already had multiple customers for this service when it was launched a year and a half ago, with popular names such as Getty Images, Morningstar, and Shutterstock on board. And now, the company has strengthened its AI enterprise software platform with the addition of NIM Agent Blueprints, which is a "catalog of pretrained, customizable AI workflows that equip millions of enterprise developers with a full suite of software for building and deploying generative AI applications."
In all, Nvidia is looking to provide enterprise customers with an end-to-end, cloud-based software platform to help them train and deploy generative AI applications. The company pointed out on its latest earnings call that it expects its software business to hit a $2 billion annual revenue run rate by the end of fiscal 2025. That would be impressive considering that a AI software specialist Palantir is forecasting $2.75 billion in revenue in 2024.
It won't be surprising to see the software business moving the needle in a bigger way for Nvidia in the long run. That's because the generative AI software platform market is forecast to generate $153 billion in revenue in 2028, growing at an annual rate of 40% over the next five years according to IDC.
As such, there is more to Nvidia's AI opportunity than just hardware. There is a good chance that it could become a much bigger company over the next decade.
Robust growth over the next decade could make this stock a multibagger
Nvidia finished fiscal 2024 with earnings of $1.19 per share. Its bottom line is expected to more than double in the current fiscal year, followed by healthy growth over the next couple of years.
NVDA EPS Estimates for Current Fiscal Year data by YCharts
But the interesting thing to note is that Nvidia's earnings growth estimates have witnessed significant upward revisions of late, as evident from the above chart. Not surprisingly, analysts are expecting the company to clock a 52% annual earnings growth rate for the next five years. Nvidia's potential addressable market suggests that it could sustain such impressive growth for a longer period.
Assuming Nvidia's earnings could grow at a relatively conservative rate of even 30% for the next decade, its bottom line could increase to just over $39 per share. Multiplying the projected earnings after a decade with the Nasdaq-100 index's forward earnings multiple of 30 (using the index as a proxy for tech stocks) -- which is a discount to Nvidia's five-year average forward earnings multiple of 40 -- would translate into a stock price of $1,170.
That would be in the neighborhood of 10x of Nvidia's current stock price. So, investors with an aim of retiring as millionaires and looking to add a potential multibagger to their portfolios can still consider buying Nvidia. In the wake of its outstanding gains, this AI stock seems built for more upside.
