Nvidia achieved a $3 trillion market cap earlier this year, an impressive achievement considering that it was approximately one-tenth that size two years ago. The advent of generative artificial intelligence (AI) has drawn investors to the stock amid its lead in graphics processing units, which are essential to AI.
However, slowing growth could set Nvidia up for a fall due to its massive valuation. Such a drop would open the door for other stocks to achieve higher market caps five years from now. Considering the trends across the tech sector, these two stocks could certainly surpass it.
Taiwan Semiconductor
My choice of Taiwan Semiconductor Manufacturing (TSM +4.49%) might raise some eyebrows, given its relationship with Nvidia and its peers. As the leading manufacturer of advanced semiconductors, TSMC (as it's known for short) plays an indispensable role in bringing AI to the world.
Unfortunately for TSMC shareholders, it has so far not benefited from the premiums that have helped its clients, such as Nvidia. The reasons are not clear although fab companies typically have not traded at high valuations. Also, TSMC operates in the geopolitically contentious Taiwan region, leading some investors to avoid it for fear of an invasion of the island.
Nonetheless, the market might not have properly assessed this risk. For one, China also depends on TSMC chips, which should make an invasion less likely. And since TSMC produces chips in Taiwan, it stands to reason that its largest clients would also face this risk, yet the market seems to overlook such possibilities in Nvidia's case.
NYSE: TSM
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Moreover, if investors start discounting Nvidia, valuations could turn in TSMC's favor. Right now, the former sells at a price-to-sales (P/S) ratio of 31, well above TSMC's multiple of 12.
Still, TSMC also makes AI chips for companies such as Advanced Micro Devices and Qualcomm. Hence, even if Nvidia remains dominant, this competition could hurt its pricing, leading to lower revenue and multiple compression.
In contrast, TSMC's market capitalization is around $900 billion. Hence, a doubling of its P/S ratio and a halving of Nvidia's would give TSMC a larger market capitalization. This does not factor in the revenue growth that should benefit both companies over the next five years. However, it shows how Nvidia might not be as far ahead of TSMC as it appears.
Once Nvidia feels more of the effects of its likely unsustainable valuation, TSMC could easily be well-positioned to surge ahead of its high-profile client.
Tesla
Investors likely know electric vehicle (EV) manufacturer Tesla (TSLA 0.44%) best for its cars or possibly its battery technology. At a market capitalization of $835 billion, it is currently the smallest of the "Magnificent Seven" stocks.
The Tesla Solar Roof and the Powerwall hold potential for growth, but that product category made up less than 12% of revenue in the second quarter of 2024. And the more than 830,000 vehicles the company sold in the first half of 2024 represented a 7% drop from 2023.
Its savior could be Autopilot, its self-driving technology that continues to make significant strides. It still requires human supervision for now, but Tesla and its supporters envision turning it into a lucrative subscription business once it achieves full autonomy.
So powerful is this potential that Cathie Wood of ARK Invest believes this technology will make up around 90% of earnings by 2029. By her calculations, that would take the price for Tesla stock to $2,600 per share, an approximate tenfold increase that would put the market cap at $8.4 trillion!
NASDAQ: TSLA
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In such a scenario, it likely makes the valuation comparisons between Tesla and Nvidia irrelevant -- the EV maker's P/E of 73 is higher than the chipmaker's 57 earnings multiple. Still, even if Tesla stock pulled back to Nvidia's P/E, a tenfold increase would take the market cap to $6.5 trillion, far surpassing Nvidia's current size.
Lastly, as previously mentioned, Nvidia could experience multiple compression as competitors eat away at some of its market share in the AI chip market. Tesla's self-driving opportunity has yet to take off in earnest, so even partial success could supercharge the stock enough to overtake Nvidia.
