How Nvidia Stock Could Jump 2.5x To Reach $300

Could Nvidia stock (NASDAQ:NVDA) reach $300 in the next few years? Does this sound ridiculous? Consider this, less than nine months ago, at the end of December 2023, Nvidia stock was trading at around $50 levels. This year the stock has grown over 2.5x and trades at close to $128 presently. Nvidia stock trades at about 75x trailing earnings. Is this pricey? Not at all. Especially if you consider the fact that the company’s earnings could be about 4x the current level in the next few years. 

How is that?

If Nvidia grows its sales at an average annual rate of over 60% for the next 3 years – its revenues could move from around $61 billion in FY’24 to around $250 billion by FY’27 or over 4x. For context, Nvidia’s revenues grew by close to 3x over the last 12 months, while notching an average annual growth rate of about 55% over the last three years. These growth rates could hold up, given the surge of demand for Nvidia’s high-end graphics chips, which have emerged as the defacto silicon for running artificial intelligence applications. The lure of AI is growing each day, and the demand for chips isn’t fading yet.

Why?

While initial AI models unveiled by the likes of OpenAI were largely text-based, models are increasingly multimodal, working with speech, images, video, and 3D calling for higher computing power and a larger number of GPU shipments. Moreover, sectors as diverse as energy to real estate, healthcare and medical equipment, and industrial robots are looking to leverage AI tech as an input that can help these companies win. 

That being said, stock markets are often myopic and tend to extrapolate short-term trends for the long run. In Nvidia’s case, the assumption is that demand growth and pricing power will hold up and profits will remain sizable as the generative AI wave advances. However, there are multiple risks and there remains a real possibility that the stock could see a sizable correction. We detail this possibility in our analysis of Nvidia’s downside to $40. Indeed we believe this broad range of upside and downside potential represents a simple fact: Nvidia is a volatile stock.

Nvidia has already done it in the past

To put things in perspective, NVDA stock swelled 900% from levels of $13 in early January 2021 to around $130 now, vs. an increase of about 50% for the S&P 500 over this roughly 4-year period. It was a bumpy ride, with returns for the stock being 125% in 2021, -50% in 2022, and 239% in 2023. The underperformance in NVDA’s stock vs. the S&P 500 in 2022 stands out in particular – as the benchmark index had returns of -19% that year. Notably, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

But there is more to the story this time around

Let’s take the case of Eli Lilly – the maker of the weight loss drug Zepbound. Like all companies, Lilly uses electricity as an input in its factories and offices. Clearly, Lilly doesn’t expect to win against a rival such as Pfizer because it uses more electricity. Now AI is fast becoming a core input for companies across sectors, just like electricity. But with an important difference. Lilly believes that leveraging AI in its R&D will help develop better products, faster than the competition. Unlike more electricity, more AI will help Lilly win in the marketplace. This changes everything. It implies Lilly will want to invest in AI. Aggressively. With little concern about price, it will be willing to pay for better, faster chips from companies like Nvidia. Nvidia is in a rare position of producing something where the demand seems limitless. Limitless, across sectors and industries. And this isn’t going away soon. 

Combine this solid revenue growth with the fact that Nvidia’s margins (net income, or profits after all expenses and taxes, calculated as a percent of revenues) are on an improving trajectory – they grew from levels of about 25% in FY’19 to about 49% in FY’24 as the company sees better economies of scale and a more favorable product mix skewed toward complex data center products. Software-related sales are also trending higher. We can assume that margins will remain flat at current levels as Nvidia’s launch of pricier higher-end products such as the Blackwell chips are offset by potential competitive pressures.

So is 4x growth in earnings possible?

Sure. Looks quite reasonable when you combine 4x revenue growth with potentially flat margins over the next few years. Now if earnings grow 4x, the PE multiple will shrink by 4 times, assuming the stock price stays the same! But that’s exactly what Nvidia investors are betting will not happen. If earnings expand 4-fold over the next few years, instead of PE shrinking from a figure around 75x now to about 19x, a scenario where the PE metric stays at about 40x to 45x looks quite likely. This would make a 2.5x growth in Nvidia stock price to levels of about $300 a real possibility.

What about the time horizon for this high-return scenario? In practice, it won’t make much difference whether it takes 3 years or 5, as long as Nvidia is on this revenue expansion trajectory, with margins holding up, the stock price could respond similarly. 

And it could be a bumpy ride yet again. While there is definitely a case to be made for large long-term gains from NVDA stock, the Trefis High Quality (HQ) Portfolio could be right up your alley if consistent outperformance is at the top of your list.

[1] Returns as of 8/28/2024
[2] Cumulative total returns since the end of 2016

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