Could Nvidia become the most valuable stock on earth?

The rise of the NVIDIA Corporation (NASDAQ: NVDA) stock price has been truly astonishing. Even by the lofty standards of the ‘magnificent seven’ US tech stocks like Alphabet, Amazon and Meta Platforms.

As recently as January last year, Nvidia shares were going for around US$148 each. Today, nothing can seem to stop this semiconductor stock‘s rise.

The company is now commanding a share price above US$690 – US$694.52 as of last night. That means that Nvidia investors have enjoyed a monstrous return of almost 400% in little over a year.

This jaw-dropping rise has resulted in Nvidia now commanding a market capitalisation of US$1.72 trillion. A few years ago, this would easily have been enough to grant Nvidia the title of ‘world’s most valuable stock’. But not today.

Despite having a market cap that is larger than many countries’ entire economies, Nvidia still trails behind valuation titans like Microsoft (US$3 trillion), Apple (US$2.82 trillion) and Saudi Aramco (US$2.06 trillion). Today, Nvidia is the world’s fourth-most valuable public company.

So Nvidia investors might be asking themselves today, particularly after the past few months’ stock performance, what it might take for their company to take out this crown.

What would it take for Nvidia to be the world’s most valuable stock?

One of the primary reasons why Nvidia shares have expanded in value in recent months has been a massive expansion in the company’s price-to-earnings (P/E) ratio – or what investors are willing to pay for $1 of Nvidia’s earnings.

As recently as October, investors were assigning a P/E ratio of around 55 to Nvidia shares. Today, investors are willing to pay an earning multiple of over 95 on those same shares.

This of course has been prompted by the explosive growth Nvidia has been reporting in recent months.

Back in November, we covered the company’s latest quarterly earnings report. This showed that, despite Nvidia’s gargantuan size, the company was able to grow its revenues by a blistering 206% year-on-year to US$18.12 billion.

Net income was up an even more unbelievable 1,259% to US$9.24 billion, helped by a rocketing gross margin of 74%.

So with numbers like that, it’s not hard to see why investors have doubled the premium they are willing to pay for Nvidia shares just over the past few months.

But even so, the fact remains that Nvidia is still more than US$1 trillion away from being the world’s most valuable company.

The likes of Apple and Microsoft are still growing their revenues and earnings at a healthy pace (although nothing like Nvidia has been).

So for Nvidia to have a shot at being number one, it will need to keep growing its numbers at the same pace it has for a few years yet. Or else investors will need to continue to expand the earnings multiple they are happy to pay for the company.

A $9 trillion company?

Of course, one, or even both of these scenarios are entirely plausible. In fact, some analysts reportedly think it’s likely. Here’s what one of our Fool colleagues over in the US recently wrote:

According to consensus estimates, Nvidia’s earnings could increase at an annual rate of 102% over the next five years. The company ended fiscal 2023 with earnings of $3.34 per share, meaning its bottom line could jump to $107 per share if it keeps doubling each year for the next five years.

Using the Nasdaq-100 index’s forward earnings multiple of 29 as a proxy for tech stocks, Nvidia’s stock price could hit $3,100 in five years. That would be 5x the company’s current stock price.

If the Nvidia stock price indeed increases by five-fold over the coming five years, it would be looking at a market capitalisation of almost US$9 trillion.

That could easily catapult the company to the largest on the planet – provided another stock doesn’t balloon at an even faster pace of course.

But only time will tell if this comes to pass.

The post Could Nvidia become the most valuable stock on earth? appeared first on The Motley Fool Australia.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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