Blue-chip stocks can be tricky for investors. On the one hand, they represent the very best companies available. Their gargantuan market caps prove their track record of value creation. On the other hand, the larger a company is, the harder it is for it to generate impressive growth in the future. Blue-chip stocks carry the risk that their best days are behind them, and new investors have missed out on most of the fun.
With a market cap of $4.5 trillion, Nvidia (NVDA 2.18%) is the largest company in the world and an excellent example of this predicament. Let's dig deeper into the pros and cons of the stock and discuss what it might take for the technology giant to hit $10 trillion by 2030.
A bet on the AI industry
While Nvidia has historically enjoyed a diversified business model with meaningful exposure to video gaming and other verticals, this is no longer the case. Since the launch of OpenAI's ChatGPT in 2022, the stock has become an all-or-nothing bet on artificial intelligence (AI) hardware. In the fiscal second quarter, its data center segment represented a whopping 88% of total revenue, mainly driven by sales of advanced AI chips, like the Blackwell used to train the most advanced large language models (LLMs).
While AI exposure has boosted Nvidia's growth, it also makes the company vulnerable to potential challenges in the industry. The most significant risk is that AI might not live up to analysts' expectations. In August, an MIT study suggested that 95% of corporate AI pilots failed to generate meaningful returns for clients, pouring cold water on earlier assumptions that this technology would rapidly transform the world.
Image source: Getty Images.
The good news is that generative AI is improving rapidly, helped in large part by better hardware. Furthermore, as an infrastructure provider, Nvidia operates on the "picks and shovels" side of the industry, which helps protect it from the uncertainties and frequent failures on the software side of the industry.
For now, at least, Nvidia's clients continue to stockpile its chips at immense markups. Q2 revenue soared 56% year over year to $45.74 billion, while the company maintains a gross margin of 72.4%.
Could future technologies play a role?
Nvidia's best chance to hit $10 trillion would involve diversifying outside of generative AI. Two compelling candidates could be robotics and automation (particularly for self-driving cars). Cathie Wood's Ark Invest optimistically believes the market for automated "mobility-as-a-service" could exceed $10 trillion in sales by the early 2030s. Nvidia could benefit from this potential growth by positioning itself on the picks-and-shovels side of the opportunity, just like with generative AI.
The company recently announced a new software platform called Nvidia Drive, designed to help developers use its hardware for autonomous vehicle development. Its chips are already widely used in many third-party robotics platforms, such as Tesla's Optimus humanoid, which uses them for model training. While automotive and robotics remain a small part of Nvidia's overall business, the segment grew 69% year over year to $586 million. Investors should expect growth to potentially accelerate over the next five years and beyond.
What will it take to hit $10 trillion?
From its current market cap of $4.5 trillion, Nvidia would have to add $5.5 trillion in value to hit $10 trillion. This sum would represent a total growth of 122%, or a compound annual growth rate (CAGR) of just over 17% per year. While this is significantly faster than the S&P 500's average return of 10%, it is not outlandish for a company with exposure to massive growth opportunities like AI, self-driving, and robotics.
That said, it's never fun to buy a stock already trading near all-time highs. Investors with thoughts of a $10 trillion market cap may want to wait for more clarity about the software side of the AI industry before considering a position in Nvidia stock.
