Nvidia (NVDA +0.18%) is no stranger to dropping bombshells on investors. Most of the time, those surprises are positive, and its latest announcement falls into that category. Although it expects data center capital expenditures to reach $600 billion by the end of this year among the big four hyperscalers, that number is expected to rise to $3 trillion to $4 trillion worldwide by 2030.
That's a huge expansion in just five years, and underscores the fact that we're still in the early innings of the AI arms race. While this may sound like a far-fetched prediction, Nvidia is in close contact with its biggest clients and is likely collaborating with them to prepare to meet their expected demand years down the road. This gives Nidia unparalleled insight into what's coming in the AI chip space.
As a result, I believe investors should take the company's projection seriously and consider the potential consequences if it pans out.
Image source: Getty Images.
Nvidia already generates a ton of money from data center buildouts
Another huge revelation Nvidia made during its conference call is that it gets about 35% of the cost to build a data center. So, if an AI hyperscaler announced that it planned to spend $50 billion on data centers in 2026, it's safe to assume that Nvidia would receive about $17.5 billion of that. That's a massive slice of the AI sector's capital expenditure pie, and that leads to the next mind-numbing projection.
If Nvidia's projection for $3 trillion to $4 trillion in annual AI infrastructure spending by 2030 proves accurate and the company continues to soak up 35% of data center capital expenditures, that indicates it could have annual revenues between $1 trillion and $1.4 trillion by the end of the decade. Considering that the largest companies by revenue in the world are currently Walmart at $685 billion and Amazon at $670 billion, this would be a huge feat.
Moreover, neither of these two has a particularly huge profit margin, while Nvidia's profit margins are among the best: It converts approximately half of every dollar it books in revenue into net income.
NVDA Profit Margin data by YCharts.
If we assume that Nvidia can maintain around a 50% profit margin, then its forecast for $1 trillion to $1.4 trillion in revenue implies $500 billion to $700 billion in profit.
This is where Nvidia really starts to separate itself from the pack. Currently, Alphabet generates the most profits of any U.S.-listed company -- $115 billion over the past 12 months.
So, for Nvidia to generate $500 billion in profits would be an unbelievable achievement -- and that's the bottom end of the projected range. But what ramifications would that have for the stock price?
Nvidia's returns would be nothing short of incredible if the projections pan out
Nvidia stock currently trades at 49 times trailing earnings and 38 times forward earnings. Based on a valuation of 50 times trailing earnings and the $700 billion profit figure at the high end of the estimated range, that would value Nvidia at $34.3 trillion in 2030.
NASDAQ: NVDA
Key Data Points
With a market capitalization of $4.2 trillion today, Nvidia is already the world's largest company. But a surge in value to $34 trillion would leave it dwarfing the rest of the market. It would also provide long-term shareholders with excellent returns along the way. Even taking a more conservative approach and assigning Nvidia a P/E ratio of 30 in five years, and then assuming it only hits the bottom end of this estimated profit range, the company would still be worth $15 trillion -- more than 3.5 times its market cap today.
I still think these are incredibly bullish assumptions from Nvidia's management. However, even if the market opportunity turns out to be half of what it predicts, Nvidia will still be an excellent investment over the next five years. There are few better stocks to capitalize on the AI arms race than Nvidia, and with massive quantities of AI infrastructure still being constructed, it stands to benefit the most. I believe Nvidia will continue to be a market-crushing stock, and investing today with the mindset of holding for the long term would be a wise strategy.
