Roughly three decades ago, the advent and proliferation of the internet began changing corporate America forever. Although it took many years before businesses figured out how to optimize their internet usage to maximize their margins and profits, it became a game-changing technology that helped companies reach new customers.
For 30 years, Wall Street and investors have been waiting for the next technological leap that could catapult corporate growth. After a long wait, artificial intelligence (AI) looks to be the answer.
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With AI, software and systems are given the capacity to make split-second decisions without human assistance. It's a broad-reaching technology that the analysts at PwC believe can increase global gross domestic product by a whopping 26% come 2030.
While a laundry list of businesses has benefited from the AI revolution, none has reaped the rewards of this technological leap forward more than semiconductor titan Nvidia (NVDA -0.12%). Since the end of 2022, Nvidia's market cap has catapulted from $360 billion to an all-time closing high of $3.76 trillion, as of June 25.
But according to one highly optimistic Wall Street analyst, the stock market's AI darling is just warming up and on its way to a greater than $6 trillion valuation.
Nvidia has a new highwater price target
To be fair, buy ratings are a dime a dozen when it comes to Nvidia. As of June, 66 Wall Street analysts had issued a rating on Nvidia, with a combined 58 listing it as the equivalent of a strong buy or buy. That compares with just one sell rating.
However, the June 25 update from Loop Capital analyst John Donovan stands out from the crowd for one particular reason: His and his firm's price target is head and shoulders above everyone else's. Donovan lifted Loop Capital's price target for Nvidia from $175 per share to $250. If Nvidia's share count stays static, we're talking about a $6.1 trillion market cap if Donovan's issued price target is achieved.
Nvidia is already the undisputed leader in graphics processing units (GPUs) deployed in AI-accelerated data centers. The company's Hopper (H100) and successor Blackwell GPUs have consistently been backlogged due to overwhelming demand. With demand for AI-GPUs handily outpacing their supply, Nvidia has been able to charge a premium for its hardware, which in turn has sent its gross margin to north of 70%.
But Donovan only sees this dominance building. In his note to investors that explained Loop Capital's Street-high price target, Donovan pointed to Nvidia shipping an estimated 6.5 million GPUs this year and 7.5 million next year, with average selling prices for these GPUs topping $40,000. For context, Nvidia has enjoyed a 100% to 300% pricing premium over its AI-GPU direct rivals.
More specifically, in speaking with various cloud-service providers, Donovan anticipates that an uptick in data center spending from governments, midsize cloud providers, and startup companies can lead to the next wave of supercharged growth for Nvidia. For instance, CoreWeave's purchase of 250,000 Hopper chips is the perfect example of startups angling to capitalize on the presumed insatiable demand for compute capacity.
The other factor working in Nvidia's favor is that it's been able to grow into its valuation over the last year. Given the company's torrid sales and profit growth, Nvidia is trading at a forward-year earnings multiple of only 27 for fiscal 2027, which will end in January 2027.
If Loop Capital's dart throw proves accurate, Nvidia can tip the scales as Wall Street's first $4 trillion, $5 trillion, and $6 trillion business.
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Loop Capital's optimism overlooks some very tangible headwinds
While there's no disputing Nvidia's monopoly-like market share of GPUs being deployed in AI-accelerated data centers, there are a couple of tangible headwinds Donovan appears to be overlooking that can send Nvidia stock in the opposite direction.
Arguably the biggest issue for Nvidia is that every game-changing technology and innovation needs ample time to mature, and we're not at that point yet with artificial intelligence.
Including the advent of the internet in the mid-1990s, there hasn't been a next-big-thing trend in three decades that's escaped a bubble-bursting event early in its expansion. The fact that most businesses aren't generating a positive return on their AI investments, nor have they optimized their existing AI solutions, suggests that investors have grossly overestimated the early-innings adoption rate and utility of this technology. This bodes poorly for Nvidia stock over the short run.
It's also impossible to overlook growing competitive pressure. Don't get me wrong, CEO Jensen Huang's aggressive innovation timeline, which will bring a new advanced GPU to market annually, should have no trouble keeping Nvidia in the lead when it comes to compute potential. But there's more to data center infrastructure than just speed.
It can be argued that Nvidia's biggest competitive edge has been the persistent scarcity of AI-GPUs. But with Taiwan Semiconductor Manufacturing ramping up its chip-on-wafer-on-substrate capacity and Advanced Micro Devices upping its production of Instinct series AI-accelerating chips, direct competition is growing.
Growing competition is expected to weigh on Nvidia's gross margin. NVDA Gross Profit Margin (Quarterly) data by YCharts.
What's more, many of Nvidia's top customers by net sales are internally developing GPUs to use in their data centers. Even though this internally developed hardware trails Nvidia's Hopper and Blackwell in terms of compute potential, it's notably cheaper and more readily accessible (i.e., not backlogged). Internally developed chips could easily take up valuable data-center real estate, delay future upgrade cycles, and pressure Nvidia's gross margin.
Lastly, Donovan's research overlooks the sustained priciness of Nvidia stock relative to its trailing-12-month (TTM) sales.
Over the past three decades, megacap companies on the leading edge a next-big-thing trend have historically topped out at TTM price-to-sales (P/S) ratios of roughly 30 to 43. Even Nvidia topped out at a TTM P/S multiple of just over 42 last summer. Although the company's rapidly expanding sales has brought this multiple down, it's still tipping the scales at a P/S ratio of almost 26. That's well over double other market-leading "Magnificent Seven" stocks, and history strongly suggests it's not sustainable.
