Successful investing is often slow and steady, but lightning strikes occasionally. Just ask investors in AI chip company Nvidia (NVDA 4.57%). A $10,000 investment made a decade ago would be worth over $2.6 million today. While rare, Nvidia’s success shows that life-changing returns can come relatively quickly.
The million-dollar question is whether investors can still get the same type of returns from Nvidia in the future. After all, the rise of artificial intelligence (AI) is seemingly in its early innings. Nvidia enjoys a near monopoly on the chips that power the massive data centers running AI models.
While Nvidia’s long-term outlook remains bright, the stock faces some obstacles in duplicating such massive returns.
Here is what investors should realistically expect from the stock.
The state of Nvidia today
The tricky thing about catching lightning in a bottle is that it’s tough to do it again. A lot went right for Nvidia to generate the stock’s massive returns in just a decade, which isn’t very long in the grand scheme of investing. It’s asking a lot to expect the same stock to go on another run like it.
Here’s where Nvidia is today:
The company has grown to a market cap of roughly $3 trillion; Nvidia’s trailing-12-month revenue is $80 billion. A decade ago, Nvidia was a relatively obscure company that built graphics processing chips primarily for the gaming industry. Today, Nvidia is a household name on Wall Street.
In other words, the stock isn’t surprising anyone these days.
The math behind turning $10,000 into $1 million
Investors need a 100-fold return to turn $10,000 into $1 million. Nvidia faces two significant hurdles here. First, at a roughly $3 trillion valuation, it’s now virtually the largest company in the world. At $3 trillion, Nvidia is nearly as big as China’s entire stock market. It’s worth almost an eighth of the whole U.S. economy. It’s doubtful that Nvidia has the room to realistically achieve a valuation of $300 trillion in our lifetimes.
That would be three times the world’s entire economic output.
AI is a big deal and could add trillions to the economy over the years. However, Nvidia is only a piece of that growth, and the stock’s $3 trillion valuation makes it clear that investors have priced a ton of that potential into today’s stock price. You can see below how much Nvidia’s market cap has outpaced its actual revenue:
NVDA Revenue (TTM) data by YCharts
This hasn’t even touched on the potential risk of Nvidia losing its stranglehold on the AI chip market. While Nvidia has as much as 90% of the AI chip market today, it’s unclear whether it can keep all of that share. Nvidia’s biggest customers, big technology conglomerates like Microsoft, are developing custom chips to help power their data centers. Competitors like AMD will undoubtedly go after Nvidia.
I’m not saying that Nvidia will lose its leadership in AI. I’m saying that lightning struck once, and it’s hard to see it happening again.
How Nvidia can help investors build wealth
The above math shows that Nvidia is unlikely to perform anywhere close to what it’s done this past decade. However, that doesn’t mean Nvidia can’t contribute to your wealth-building efforts. Nvidia’s surging growth from AI will generate substantial cash flows that can be used to repurchase shares and help drive earnings growth and share price gains. Analysts still believe Nvidia will grow earnings by an average of 37% annually over the next three to five years.
That could easily be a recipe for market-beating investment returns. Shares trade at a forward price to earnings ratio of 46, which is reasonable for a company growing earnings as fast as Nvidia is. So, while the ship has sailed on Nvidia being a life-changing multibagger, it can still do its part to help build wealth in a diversified portfolio.
As long as expectations remain realistic, investors should be excited to buy and hold Nvidia stock.
