The market can’t get enough of artificial intelligence (AI) darling Nvidia (NASDAQ: NVDA). The semiconductor giant sits just shy of a $3 trillion valuation, making it the third-largest company in the world.
Nvidia is the premier provider of AI chips. Its hardware powers the technology so many believe is the next big thing. Since ChatGPT-3 was first released to the public, Nvidia’s stock is up almost 700%, and it tipped above $1,200 a share last week.
Shares are now trading at around $130. What happened? No, the company’s stock did not crater and lose 90% of its value. Instead, the massive rise in price led the company to initiate a 10-1 stock split. Shareholders now own 10 times as many shares as they did before the split, with each share worth a tenth of the price.
A split like this is more or less cosmetic; in and of itself, it doesn’t change the values of people’s investments. However, it’s not without consequence. The stock is now more accessible to smaller investors; $130 is much easier to stomach than $1,200, a number that might have kept investors from grabbing a few shares.
It wouldn’t be the first time
Reaching $1,200 again would mean a 10x from today’s price. Nvidia already pulled off a 10x in the last three years, but doing so again would mean reaching a $30 trillion market cap — a mind-boggling figure. It’s a different ball game when you are already the third-largest company in the world, but it’s not without precedent.
In 2010, Apple was the second-largest company in the world. The company made headlines that year as it neared a $300 billion market cap. Fast-forward to 2022, and Apple was again in the headlines, this time as the largest company in the world and the first to pass the $3 trillion mark. I bet $3 trillion seemed mind-boggling to a lot of investors in 2010, but here we are.
Look to the market for clues
Let’s start by assuming Nvidia’s growth will slow from the past three years. What’s a more reasonable rate? The market as a whole is a good place to start. Statista.com predicts a compound annual growth rate (CAGR) of about 28.5% through 2030 for the entire AI market. If that growth rate holds, it would take roughly nine years for Nvidia’s stock to reach $1,200 again.
But before you get too excited, there are a few pretty huge assumptions there. We’re assuming that projected CAGR holds beyond 2030 and that it isn’t overinflated to begin with. Secondly, we’re assuming that the market will value Nvidia relative to its earnings the same over time. This isn’t necessarily true. Just because a company grows its earnings doesn’t mean its stock price will respond in kind, but it’s a useful simplification for now.
So if we make those assumptions, can Nvidia grow at the same rate as the overall market? I’m not sure it’s likely for a few reasons, competition being chief among them.
The chips won’t be in such short supply
Nvidia currently has a near stranglehold on the AI chip market — about 80%. This gives Nvidia a lot of pricing power, allowing it to enjoy incredible profit margins. But I think this will change.
Long-time competitors Intel and Advanced Micro Devices are doing everything they can to catch up. To date, they haven’t been able to produce something on par with Nvidia in the eyes of the market. But make no mistake, they are trying. AMD CEO Lisa Su said at a recent unveiling of the company’s latest chips, “AI is our No. 1 priority.” Nvidia isn’t the only company capable of producing hardware that can service the industry.
And it’s not just rival chipmakers. Perhaps more concerning is that Nvidia’s main rivals — think Alphabet, Microsoft, and Amazon — are pouring money into their own chipmaking programs, hoping to detach themselves from outside suppliers altogether. Nvidia will have to stay ahead of the most innovative companies in the world — and do it at a price that remains competitive.
A more reasonable view
Can Nvidia reach $1,200 again? Absolutely. Will it? I think it’s likely. When? Don’t expect a repeat of the last three years. A more reasonable timeline would be at least a decade. That would still be amazing growth that far outpaces what the vast majority of solid investments return. Getting too hung up on giant multiples or specific price targets can ultimately distract from making sound decisions in the market.
Should you invest $1,000 in Nvidia right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
After Nvidia’s Stock Split, Can It Reach $1,200 Again? was originally published by The Motley Fool
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