NVIDIA is primed for growth and more record setting

$4 trillion market cap and more is well in sight.

Introduction

NVIDIA has been a staple in the technology industry, known for its leadership in the graphics processing unit (GPU) market. With significant advancements in AI and data center technology, NVIDIA’s strategic positioning has seen notable upgrades, ranging from $150 to $185, implying a market cap of up to $4.5 trillion. In this post, I explore why there is still lots of optimism around NVIDIA and the drivers of its growth.

Why NVIDIA is Being Upgraded

Several factors contribute to the growing optimism around NVIDIA’s near- and mid-term outlook:

1. Strong Demand in AI and Data Centers

• NVIDIA’s data center segment has emerged as the company’s most significant growth engine. As hyperscale computing and sovereign AI projects increase, NVIDIA’s advanced GPUs (e.g., the Hopper and Blackwell series) are positioned to meet the surging demand. Analyst projections for NVIDIA’s data center revenue show mid-teen quarterly growth rates, driven by both existing products and new releases such as the Blackwell Ultra GPU .

2. Expansion in Sovereign AI Projects

• Sovereign AI, a category encompassing government-driven AI initiatives, represents a burgeoning demand vector. Key regions, including the Middle East and Asia-Pacific, have already committed billions towards AI infrastructure projects powered by NVIDIA’s GPUs. For instance, Saudi Arabia’s planned AI investments and Japan’s AI factory initiatives indicate significant future revenue streams .

3. Advancements in AI Capabilities and Product Line

• The introduction of new GPU architectures like the Blackwell series marks a strategic shift towards next-generation AI capabilities. The transition from Hopper to Blackwell, coupled with the upcoming Rubin platform utilizing HBM4 technology, suggests a solid product roadmap that aligns with the increasing requirements of high-performance AI applications .

4. Resilient Performance Amid Supply Chain Dynamics

• Despite global supply chain challenges, NVIDIA’s procurement strategy, particularly its CoWoS (chip-on-wafer-on-substrate) capacity expansion, is expected to boost unit shipments and enhance product availability. This strategic investment is projected to drive a 30% year-over-year increase in aggregate capacity, reinforcing NVIDIA’s competitive edge in meeting growing market demand .

Financial view of NVIDIA

NVIDIA’s financials reflect its strong market positioning and growth prospects, though they also reveal areas that require close monitoring. Let’s dive into the company’s key financial metrics and valuation.

1. Revenue and Earnings Growth

• NVIDIA’s revenue surged from $26.9 billion in FY2022 to a projected $129.3 billion in FY2025, demonstrating a remarkable CAGR of over 60%. This is absolutely staggering at the size NVIDIA already has. This growth has been fueled primarily by the data center segment, which alone is expected to contribute approximately $210.6 billion in revenue by FY2026 . Already in NVIDIA´s next financial year, the company will make more EBIT than it does Revenues in the current financial year. Not something we often get to see, and especially not when the revenues exceed $100 billion!

2. Profitability Metrics

• NVIDIA’s EBIT margin has expanded significantly, from 33.5% in FY2023 to an estimated 66.6% in FY2025. This improvement highlights operational efficiency and pricing power, especially in high-margin segments like AI and data center GPUs. ROIC is projected to exceed 400%, underscoring the company’s effective capital allocation strategies . Remember, Warren Buffett tells us to look for pricing power as one of the defining traits of a great company.

3. Valuation Ratios

• As of the latest estimates, NVIDIA trades at a forward P/E ratio of 50x for FY2025, suggesting a premium valuation. However, given its strong growth trajectory, this multiple is justified in the context of expected earnings per share (EPS) growth, which is projected to increase from $2.95 in FY2025 to $6.17 in FY2026 .

4. Free Cash Flow and Balance Sheet Strength

• NVIDIA’s free cash flow has shown robust growth, with an FCF yield projected at 4.4% for FY2027. This improvement is a direct result of strong operating cash flows, driven by higher margins and efficient cost management. Additionally, NVIDIA’s net cash position is expected to exceed $200 billion by FY2027, and thus NVIDIA will join another coveted club .

5. Investment Risks and Considerations

• While NVIDIA’s growth prospects appear strong, there are potential risks to monitor. Competition from Intel’s Many-Integrated Core (MIC) processor family presents a challenge to NVIDIA’s professional GPU computing products, as Intel’s approach may offer greater flexibility and simplified software development. Additionally, geopolitical tensions, particularly involving export restrictions to China, could impact NVIDIA’s supply chain and sales volumes .

Conclusion

NVIDIA’s near- and mid-term outlook appears promising, driven by strong demand in AI and data center markets, a robust product roadmap, and strategic expansions in key sectors. While the premium valuation may seem high for some investors, the underlying growth potential and financial performance metrics suggest that NVIDIA remains a compelling case. $4 trillion market cap is well in sight.

For investors seeking exposure to cutting-edge AI and data processing technology, NVIDIA offers a unique blend of growth and profitability. However, it’s crucial to stay vigilant about potential risks, including competition, margin pressures and geopolitical challenges, that could impact the company’s trajectory.

With that, thanks for reading, I really appreciate the interest. Below are links to a few other items that you might find interesting.

Other readings:

• NVIDIA and sovereign projects: https://www.digitimes.com/news/a20240918PD211/saudi-arabia-nvidia-high-end-chips-2025.html

• Onto Innovation on new developments in semiconductors: https://ontoinnovation.com/writable/files/Resources/Intelligent-Innovation-The-Long-Climb-Formatted.pdf

• Earlier Kontra article on Amazon:

Here is Jensen explaining how much more NVIDIA margins can expand 😁