Nvidia (NVDA 1.28%) has soared to the top of the list of most valuable companies in the world thanks to its best-in-class graphics processing units (GPUs). Nvidia's chips are essential for training large language models and using them in applications. As big tech companies race to build better and better AI capabilities, they've been buying up Nvidia's chips as fast as the company can provide them.
As Nvidia approaches a $4 trillion market capitalization, few other companies are even close to that value. Microsoft is the only other company with a value above $3.5 trillion. But I expect that two other companies will surpass Nvidia's valuation within three years, even though they're currently worth between 50% and 60% of Nvidia's market value.
Image source: Nvidia.
Can Nvidia break $4 trillion?
As I write this, Nvidia is within 4% of the $4 trillion milestone. Not only would that make it the first company to surpass that value, it would also come after extremely fast growth. The company was worth less than $1 trillion just a couple of years ago. A company that large growing that fast is an incredible refutation of the law of large numbers.
Two factors have been driving Nvidia's strong stock performance. First, its revenue growth has continued to impress. Total revenue climbed 69% in the first quarter to $44.1 billion. On top of that, it's produced an extremely high gross margin each quarter as demand continues to outstrip its supply for new chip designs. Adjusted gross margin in the first quarter was 71.3%. The combination has led to incredible earnings growth for the business.
While Nvidia has managed to stay ahead of competing chipmakers in the GPU space, its biggest competitors are showing signs of catching up in performance. On top of that, a huge chunk of its business is concentrated in just a handful of big customers. And those customers are actively working to move more of their AI workloads onto custom chip designs made by other chipmakers in order to improve cost performance. Those customers are also incentivized to explore alternatives to Nvidia in order to prevent the chipmaker from price gouging them.
While Nvidia should continue to take the bulk of the share in AI chip sales, its stock is priced as if the above threats didn't exist. That makes it a risky investment right now, and it's not unreasonable to expect slower growth in the stock over the next three years.
That gives an opportunity for two undervalued tech giants to surpass the chipmaker in market cap. These two look like they could grow well beyond Nvidia over the next three years.
1. Amazon
Amazon (AMZN 1.62%) operates the second-largest retail business in the world and the largest cloud computing platform in the world.
Like Nvidia, Amazon has seen its business benefit from the growing spending on artificial intelligence (AI). Despite its slow start in the generative AI space, Amazon Web Services (AWS) has managed to maintain its leading position and offer compelling AI services to developers. During its first-quarter earnings call, CEO Andy Jassy said its AI business is generating multiple billions of revenue for AWS and growing at triple-digit percentage rate.
That strong growth has helped expand the operating margin for AWS, which climbed to 39.5% in the first quarter. At the same time, management says demand for its servers exceeds its supply, so it's spending heavily to expand its capacity. Total capital expenditures will total over $100 billion this year, management says. Most of that will go toward building and outfitting new data centers.
Amazon's massive cash outlay for its growing cloud computing business is supported by the recent strength of its retail operations. In particular the company has pushed its operating margin significantly higher over the last couple of years, thanks, in part, to a reorganization of its U.S. logistics. It's now able to ship more items to customers with faster speeds, which has also helped keep its shipping expenses low as a percentage of sales. Additionally, Amazon has seen strong growth in its high-margin advertising sales. Overall, its North American retail operating margin has expanded to 6.6% of the last 12 months and its international segment turned positive last year.
There are a couple of reasons Amazon should see its value increase substantially over the next three years. First, the strong results of its cloud and retail operations should continue for the foreseeable future. As the leading cloud provider, it's still in pole position to attract enterprises looking to utilize AI in their operations.
Second, the company should see strong free-cash-flow growth over the next three years, as it sees growing spending on AWS with smaller steps up in capital expenditures. That could push the company toward $100 billion in free cash flow in short order. If the stock offers a 2.5% free-cash-flow yield, which is below its historical average, that would make it a $4 trillion company.
2. Meta Platforms
Meta Platforms (META 0.73%) is the largest social media company in the world with over 3.4 billion unique users across its family of apps. It's also a leading developer of virtual and augmented reality technology.
Meta has been spending heavily on developing artificial intelligence for years, recently stepping up its investments as generative AI shows the promise to completely transform its business. Not only is Meta planning about $70 billion of capital expenditures this year to build out data centers, it's also been on a hiring spree recently. That includes a $14.3 billion investment in Scale AI, which led the company's CEO to migrate to Meta and head up its new AI super intelligence lab.
The company is working to catch up with leading models after its Llama 4 model disappointed developers. But with the speed of change in the industry, Meta has the capability of doing just that.
The impact of AI on Meta's operations over the last couple of years is already notable. The company's ad revenue climbed 16% in the first quarter on the back of both higher engagement and higher ad prices. But both could get a boost from further advances in AI.
Meta is now working on an AI agent that can develop, test, and optimize ad campaigns for marketers. This could increase existing marketers' willingness to spend on ads while bringing in new advertisers to the Meta ads ecosystem. And if AI is better at tailoring ads to individuals than humans, it could result in higher conversions, further supporting higher ad spending on Meta's platform.
That capability also speaks to Meta's ability to develop AI-generated content unique for each of its users to boost overall engagement on its platform and increase advertising opportunities. Meta's already experimenting with limited AI-generated content in its feeds.
This should support strong revenue growth for Meta over the next few years, even as it spends heavily on both generative AI and its Reality Labs segment. And if AI can push more consumers to buy wearables like Meta's AI glasses or Oculus headsets, that could further support strong margin expansion for the business.
The stock currently trades for 29 times forward earnings expectations. But I predict Meta will outperform existing expectations over the next three years and the stock will climb rapidly as a result. Even if it maintains its current earnings multiple, average earnings growth of just 14.5% over the next three years -- in line with analysts expectations -- should push the stock more than 50% higher from here, approaching $3 trillion. And there's a lot of upside from here.
