Nvidia Stock — The Road to $200

Will Nvidia stock hit $200 in the next two years? I think it’s possible. How? Think about it. About nine months ago, as of the end of December 2023, Nvidia stock was trading around $50. This year, the stock has grown more than double since then and is now trading near $116. Looking at valuation, Nvidia stock is trading at about 95 times its all-time high earnings. Is this overvalued? It’s not. Especially considering the company’s steadily expanding earnings, the long-term growth trajectory of the artificial intelligence market, and Nvidia’s commanding lead in the accelerated computing market. The Fed’s recent rate cuts could also be a boost as investors seek growth opportunities in a low-interest rate environment. In the scenarios below, we use Nvidia’s revenue, profitability, and valuation multiples to chart a possible path for the stock to hit $200.

Lower fares, shift to multimodal model boost revenues

Nvidia’s revenue has grown nearly threefold over the past 12 months and has experienced an average annual growth rate of about 55% over the past three years, and this momentum is likely to be sustained. If Nvidia achieves an average annual growth rate of 60% or more over the next two years, revenue could grow from about $61 billion in FY24 to about $155 billion by FY26, or more than 2.5 times.

There are several trends that could drive continued growth. While early AI models introduced by OpenAI and others in 2022 were primarily text-based, models are becoming increasingly multimodal, dealing with voice, images, video, and 3D, demanding higher computing power and increasing shipments of GPUs. Additionally, unlike a decade or so ago, when advances in computing power, especially in processors, outpaced development software that could fully exploit these capabilities, in the AI ​​era, the demand for computing power is skyrocketing due to the demanding computing requirements of machine learning models. This trend could translate into continued strong demand for Nvidia.

Additionally, the Federal Reserve’s easing of monetary policy last week could be an additional tailwind for NVIDIA. The Federal Reserve’s 50 basis point interest rate cut last Wednesday was the first in nearly four years. Check out our analysis of other ways to profit from the Fed’s next move. After the cut, the benchmark federal funds rate is at 4.75% to 5%, leaving room for the central bank to cut rates further. Low interest rates are typically favorable for growth sectors such as technology because a lower discount rate increases the present value of future earnings. Low interest rates are especially favorable for NVIDIA. Why? Lower interest rates could lower financing costs for builders of large data centers, boosting capital spending in the sector and favoring companies such as NVIDIA that sell GPUs for servers. Additionally, the economics of the AI ​​revolution remain mixed, given the high costs of model training and inference. Lower interest rates could improve the economic feasibility of these investments.

Currently, the stock market is often myopic and tends to extrapolate short-term trends into the long term. In Nvidia’s case, the assumption is that demand growth and pricing power will hold up, allowing profits to remain strong as the wave of generative AI advances. However, risks are multiple and the stock price could still undergo a significant correction. We discuss this possibility in detail in our analysis of the possibility of Nvidia dropping to $40. Indeed, we believe this wide range of upside and downside potential is indicative of the simple fact that Nvidia is a volatile stock.

Nvidia has done it in the past.

To put it in perspective, NVDA stock has risen over 800% from $13 in early January 2021 to around $130 now, while the S&P 500 has increased by around 50% over the last 4 years. The stock has been volatile, returning 125% in 2021, -50% in 2022, and 239% in 2023. NVDA stock’s poor performance against the S&P 500 in 2022 is particularly noticeable, as the benchmark index returned -19% that year. Notably, the 30-stock Trefis High Quality Portfolio has outperformed the S&P 500 every year over the same period. Why is that? Because as a group, the HQ Portfolio stocks have offered lower risk and better returns than the benchmark index. The HQ Portfolio has experienced less rollercoaster-like volatility, as evidenced by its performance metrics.

Profit margins are expected to remain high, driven by luxury items

Combining this solid revenue growth with the fact that Nvidia’s margins (net profit, or profit after all expenses and taxes, calculated as a percentage of revenue) are trending up, we see margins increasing from about 25% in fiscal 2019 to about 49% in fiscal 2024 as the company finds improved economies of scale and a more favorable product mix biased towards complex data center products. Software-related revenue is also trending up. We can assume that margins will remain at current levels even as Nvidia launches more expensive high-end products such as Blackwell chips, but this will be offset by potential competitive pressures.

Strong performance means smaller decline in profit ratios

Now, if earnings grow by 2.5x, assuming the stock price remains unchanged, the PE multiple would shrink by 2.5x to about 40x levels. But Nvidia investors are betting that that is exactly what will not happen. If earnings grow by 2.5x over the next few years, it seems quite likely that the PE metric would remain at about 65x, rather than shrink from the current 95x to about 40x. This makes it realistic that Nvidia’s stock price could rise to about $200 over the next two or so years. What is the time horizon for this high earnings scenario? Actually, it doesn’t make much difference whether it takes two or three years. As long as Nvidia remains on this earnings growth trajectory, earnings margins will hold and the stock price is likely to respond in kind.

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