1 semiconductor stock is set to join Apple, Microsoft, Amazon and Alphabet in the trillion dollar club

The United States has been the birthplace of the world’s largest corporations for more than a century. The economy has seen a steady changing of the guard, with different industries taking turns creating the most value:

• United States Steel It became the world’s first billion-dollar company in 1901.
• Automotive manufacturing led general motors to the world’s first $10 billion valuation in 1955.
• industrial conglomerate General Electric It became the world’s first $100 billion company in 1995.
• Finally, the tech giant apple It became the world’s first trillion-dollar company in 2018.

Technology continues to be the leading value creator today

Since then, Apple has joined in MicrosoftAnd Amazonand the parent of Google the alphabet In the trillion dollar club. But another potential participant is knocking on the door.

nvidia (NVDA 2.54%) It is the world’s leading producer of advanced semiconductors, especially those designed to power new technologies such as artificial intelligence (AI). After filing a massive earnings report for the first quarter of fiscal 2024 (ending April 30), Nvidia stock rose 24%, pushing its market capitalization to $940 billion.

This means that it may be about to cross the stock market’s most exclusive valuation threshold. But I think Nvidia has the potential to grow well over $1 trillion just over the long term. Here’s a closer look at why this is to be believed.

Artificial intelligence is at the core of Nvidia’s business

Although the AI ​​boom appears to be only beginning in 2023, Nvidia CEO Jensen Huang has been discussing the technology’s potential for years. In fact, he personally delivered the first dedicated artificial intelligence supercomputer to OpenAI in 2016, and Nvidia chips have been responsible for training the ChatGPT large language model since then.

Now, every major cloud computing provider — from Microsoft to Google — is clamoring for Nvidia GPUs in their data centers to give millions of commercial customers access to AI. In the first quarter, Huang said there was $1 trillion worth of existing data center infrastructure that needed to transition to accelerated computing to implement technologies like generative AI.

guess what? Nvidia has an estimated 90% market share in this particular segment. The company said it is now rapidly increasing supply of its entire family of data center chips to “meet the growing demand.”

But Nvidia doesn’t just dominate the data center when it comes to AI. The company’s automotive segment is home to its Drive platform, a hardware and software solution for automakers wanting to install fully autonomous self-driving capabilities into their new vehicles. Their client list includes old brands such as Mercedes Benzand promising electric vehicles such as New.

In the first quarter, Nvidia’s automotive revenue more than doubled year-over-year to $296 million, but there was even bigger news: Its revenue pipeline grew to $14 billion, up from $11 billion a year ago.

Nvidia shattered Wall Street’s expectations in the first quarter

Wall Street analysts expected Nvidia to post $6.5 billion in revenue and $0.92 in non-GAAP earnings per share in the first quarter. The company blew those numbers with $7.2 billion in revenue and $1.09 in earnings per share instead.

The result was driven by the data center segment, which generated record quarterly revenue of $4.2 billion compared to an expected $3.9 billion. Nvidia’s chief financial officer said that growing demand for chips related to generative AI and large language models supports the data center segment’s strong performance (no surprises there).

But the real driver was the future direction of the company. Nvidia expects revenue in the second quarter to reach $11 billion — not only higher than the $7.2 billion Wall Street predicted, but it would be Nvidia’s highest quarterly result in its history.

The stock market is a forward-looking machine

Let’s be clear: Nvidia stock is expensive today when measured against nearly all traditional valuation metrics. Based on the company’s $3.06 in non-GAAP 12-month earnings per share, the price-to-earnings (P/E) ratio is currently 124. four times Average price-earnings ratio of other big tech companies, given Nasdaq 100 The index is trading at P/E only 28 at the moment.

But investors are always looking ahead, and the estimations surrounding AI are staggering, even on the low end. McKinsey & Company believes that 70% of all businesses will use AI by 2030, which will create $13 trillion in additional global economic activity. Arc Investment Management by Cathy Wood puts that number at a staggering $200 trillion.

Even if the real outcome is somewhere in the middle, AI will have the potential to be the greatest value creator in history. And as I touched on earlier, Nvidia has a 90% market share in AI chips, so almost every company that develops the technology will do so in addition to their hardware.

Nvidia stock would have to rise just over 6% for the company to join Apple, Microsoft, Amazon and Alphabet in the trillion-dollar club, so it seems like a foregone conclusion. But in the long run, it really has the potential to surpass all of these names and become the largest company in the world.