Could Nvidia Attain a $4 Trillion Valuation by Year's End? Three Justifiable Reasons Support This Possibility.
Nvidia (NVDA, up 1.82%) once again impressed, crushing expectations in its third-quarter earnings report on Nov. 20.
The tech giant saw a remarkable 94% increase in revenue during the quarter, surpassing forecasts of $33.1 billion, with a revenue total of $35.1 billion. Earnings per share (EPS) also saw a significant boost, nearly doubling from $0.40 to $0.81, again outperforming estimates of $0.75.
Despite the impressive performance, shares mildly dipped due to investor familiarity with Nvidia's track record of surpassing predictions, and expectations for a stronger fourth-quarter guidance of $37.5 billion - a 70% increase from the previous year's quarter.
At the moment, Nvidia's market cap stands at an impressive $3.5 trillion, making it the most valuable company globally. However, it's not unreasonable to ponder whether it'll be the first to breach the $4 trillion threshold. Given its current trajectory, it's a strong possibility, and it might happen sooner than anticipated.
1. Supply remains a major limitation
Since the launch of ChatGPT, Nvidia has consistently reported high revenue growth. The Q3 was an exception, marking the first time in six quarters without triple-digit sales growth, but a 94% revenue increase is nothing to scoff at.
As Nvidia's growth gradually slows, it's still experiencing substantial revenue growth each quarter, indicating the business is still thriving. However, the remarkable revenue increase during the third quarter doesn't fully reflect the true demand for Nvidia's products, as supply remains constrained by Taiwan Semiconductor Manufacturing's production capabilities.
During the earnings call, CFO Colette Kress described customer demand for its new Blackwell platform as "staggering" and the demand for the legacy Hopper platform as "exceptional." Regarding the Blackwell platform, she foretold that demand would continue to outstrip supply, with excess demand lasting several quarters in fiscal 2026.
While it's challenging to accurately measure company demand, quarterly revenue serves as a reasonable starting point for potential revenue estimates, rather than an accurate representation of actual product demand.
2. The bears have been vanquished
Wall Street has been universally bullish on Nvidia for some time, and that sentiment remains despite a slight dip after the Q3 earnings report. Over a dozen analysts upgraded their price targets on the stock despite subpar Q3 results.
While there are bearish arguments against Nvidia, competition is not a major concern, especially considering that AMD and Intel have already introduced competing AI accelerators. However, these competitors have yet to pose a significant challenge to Nvidia.
AMD's share price tumbled post-earnings due to underwhelming guidance and job cuts, while Intel announced a comprehensive restructuring. Nvidia's data center revenue run rate has surpassed $120 billion, making it challenging for competitors to catch up.
Another bearish contention revolves around an "AI bubble" in tech. However, Nvidia's Q3 report counters that narrative, as the company continues to experience demand from various sectors beyond large language models.
CEO Jensen Huang asserted that scaling up efforts are ongoing, with a focus on training, post-training, and inference, dismissing the idea of an AI bubble. While high-growth assets may face the risk of a bubble forming, Nvidia's results provide no indication of a slowdown or underlying structural issues.
3. The stock appears less expensive than it seems
Following the Q3 earnings report, Nvidia now trades at a trailing price-to-earnings ratio (P/E) of 55 - more than double the S&P 500's P/E. Yet, the swift pace of growth mitigates the relevance of these trailing metrics.
Nvidia reported an adjusted EPS of $0.81 in the third quarter, which translates to a P/E of 44 based on a four-quarter average. This appears to be a more accurate reflection of its current valuation.
Forward estimates are less reliable as Nvidia routinely surpasses them. The consensus for FY 2026 EPS sits at $4.31, leading to a forward P/E of 34. Over the last four quarters, Nvidia has consistently outperformed consensus EPS by an average of 9%, which could push its next year's EPS to at least $4.70 and a lower forward P/E of 31.
These ratios don't factor in Nvidia's remarkable growth, as it continues to double its year-on-year EPS.
$4 trillion might be within reach
To achieve a market cap of $4 trillion, the stock would only require a 14% increase, a rather attainable goal by the end of the year.
Nvidia delivered another stellar Q3 result and remains the dominant player in the burgeoning computing platform. The company's journey to a $4 trillion market cap is inevitable; the question is when.
- With the surge in demand for Nvidia's products, particularly the Blackwell platform, investors may consider investing more money into the company's finance sector to boost production capabilities, as supply constraints from Taiwan Semiconductor Manufacturing continue to pose a challenge.
- Despite the high price-to-earnings ratio, the investing community might view Nvidia as a potentially lucrative long-term investment, considering its impressive revenue growth and dominant position in the technology market, with the possibility of the $4 trillion market cap being reached sooner than anticipated.
