Chip maker Nvidia stock price (NVDA -0.02%) It has soared more than 2,400% in the past five years alone. The stock is proving to be a growth machine due to advances in artificial intelligence (AI) and the importance the company’s chips will play in next-generation technologies.
But since the company is now one of the most valuable companies in the world and amassing such incredible profits, is it too late to invest in Nvidia? Is it an exceptional long-term investment, with the potential for a $25,000 investment to grow to more than $1 million over the long term?
Why investors can remain bullish on Nvidia
Investing in a stock like Nvidia that is already generating out-of-this-world profits will turn off many investors. After all, if it’s risen this quickly, you might be wondering how much more it can rise.
But if you’re bullish on AI, there’s reason to be optimistic that Nvidia can continue to rise. That’s because it dominates the AI chip market. With its market share of over 70%, many companies developing AI models have to rely on Nvidia.
Even as other technology companies develop custom chips, demand for Nvidia remains strong. There’s no better proof of that than looking at the numbers. Nvidia’s growth rate remains impressive.
NVDA Operating Revenue (Quarterly YoY Growth) Data by YCharts
Although the growth rate has slowed down slightly, it will be difficult for any company to continue tripling sales. But an average annual growth rate of about 80% over five years is impressive.
And the silver lining is that demand for AI is likely to remain strong for years to come. Analysts at Grand View Research predict that the AI chipset market could reach a value of $323 billion by 2030, expanding at a compound annual growth rate of 28.9% until then. Nvidia is a key backer of these growth opportunities, and as a result, there may still be plenty of room to further increase the value of this business in the future.
Will Nvidia stock be a 40 bagger investment?
There’s no question that Nvidia has the potential to become even more valuable in the future. But the big question is whether it can generate a 40x return. It takes a 40x return to turn a $25,000 investment into at least $1 million. To put that in perspective, ask yourself if you think NVIDIA might one day be worth about $150 trillion, 40 times its current market cap.
It probably won’t happen right away, but if you’re talking about a 20+ year period, this includes a lot of future growth. For Nvidia stock to grow to such a valuation, it would need to generate an average return of about 20.3%. Over a 25-year period, growth should be a little more modest at 15.9%.
While such a growth rate may be more manageable, it still requires Nvidia to completely dominate the market and outperform the S&P 500 market. (^GSPC 0.16%) The long-term average annual return is about 10%. Whether you think that’s a realistic scenario depends a lot on your expectations for AI. It’s definitely possible if companies invest enthusiastically in new technologies and Nvidia remains a top AI vendor.
Personally, I’m a little more skeptical about the AI hype and expect that many companies may not see the value in developing their own AI chatbots and models. I would be cautious about expecting very high returns from Nvidia in the long run, as this could become a new tech bubble. I’m also not convinced that this business can generate 40x returns for investors just by continuing to generate impressive numbers for decades.
Either way, NVIDIA may still be worth investing in
Even if Nvidia doesn’t have what it takes to be a billionaire-making investment in the long run, that doesn’t mean it’s not still a good investment to add to your portfolio. It is growing rapidly and its valuation is not very high. The company’s stock price is less than 60 times trailing earnings, which may not be that far-fetched for a company as fast-growing as NVIDIA.
This is a top company to invest in, but investors should temper their expectations. Nvidia has made impressive profits in recent years, but that doesn’t mean this trend will simply continue in the long term. Nvidia may be a good growth stock to buy and hold, but I don’t think it will generate life-changing returns for investors who buy it now.
David Jagielski has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has a disclosure policy.
