This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia Corp (NASDAQ: NVDA) and Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) delivered what can only be described as monster returns for shareholders over the last five years. The stocks surged 2,490% and 195%, respectively, while the S&P 500 Index (SP: .INX) advanced a mere 80%.
Better yet, that outperformance could continue in the coming years. Nvidia and Alphabet should benefit as businesses invest in artificial intelligence infrastructure, so much so that they could join Microsoft Corp (NASDAQ: MSFT) and Apple Inc (NASDAQ: AAPL) as members of the elite $3 trillion club in the near future.
Here's what investors should know.
Nvidia could be a $3 trillion company by the end of 2024
Nvidia currently has a market capitalization of $2.7 trillion, meaning shares would need to increase 11% for the company to reach a $3 trillion valuation. That could happen by the end of 2024. My reasoning is simple: Nvidia graphics processing units (GPUs) are the industry standard in accelerating complex data center workloads like artificial intelligence (AI), and businesses are spending money hand over first where AI is concerned.
Case in point, five large cloud computing companies — Alphabet, Amazon, Meta Platforms, Microsoft, and Oracle — will record $181 billion in capital expenditures (capex) this year, according to JPMorgan Chase estimates. That implies 36% growth in capex spending, a substantial acceleration from 10% growth last year, primarily due to AI infrastructure buildouts.
Few (if any) companies will benefit more than Nvidia. The chipmaker holds 98% market share in data center GPUs and up to 95% market share in AI processors, according to Mizuho Securities. Nvidia is also gaining momentum in other data center hardware categories. Its Grace central processing unit (CPU) is ramping toward a multibillion-dollar product line, and its InfiniBand/Ethernet networking platforms are already a multibillion-dollar business.
Indeed, Nvidia could cross the $3 trillion threshold when it announces second-quarter results on Aug. 28. Wall Street underestimated sales and earnings growth in each of the last four quarters. Another low estimate could cause the stock to pop, and such an outcome seems plausible. CFO Colette Kress recently said that demand for H200 and Blackwell GPUs is "well ahead of supply, and we expect demand may exceed supply well into next year."
Blackwell GPUs are state-of-the-art chips that can accelerate AI training and inference by factors of four and 30, respectively, compared to the previous Hopper generation. They are also more power efficient, such that they reduce the total cost of ownership by a factor of 25. CEO Jensen Huang recently told investors, "The Blackwell architecture platform will likely be the most successful product in our history."
Going forward, Wall Street expects Nvidia to grow earnings per share at 34% annually over the next three years. That makes its current valuation of 66 times earnings seem fairly reasonable, and it puts a $3 trillion valuation within easy reach. In fact, assuming earnings grow as quickly as analysts expect, Nvidia would be a $4 trillion company in 2026, even if shares trade at a more reasonable 45 times earnings.
Alphabet could be a $3 trillion company by the end of 2025
Alphabet currently has a market capitalization of $2.1 trillion, meaning shares would need to increase 43% for the company to achieve a $3 trillion valuation. That could happen by the end of 2025. Alphabet is the largest adtech company and third-largest cloud infrastructure provider worldwide. Grand View Research expects those markets to grow at annual rates of 22% and 21%, respectively, through 2030.
Building on that, Alphabet has invested billions of dollars in AI product development over the years. Indeed, Forrester Research recently recognized its dominance in AI infrastructure solutions, and the company is bringing that expertise to bear on its adtech and cloud computing businesses.
Alphabet recently added a conversational feature in Google Ads that lets brands create campaigns with natural language. It also introduced AI-powered image generation and profit-optimization tools to boost conversion rates. Those innovations should keep Google top of mind for advertisers. Additionally, CEO Sundar Pichai says AI Overviews in Google Search are boosting engagement and increasing user satisfaction, which should allay concerns about the company losing share in internet search.
Additionally, Alphabet has drawn more than 1.5 million developers to Google Cloud with Gemini, a multimodal model that can process language, images, video, audio, and computer code. The company is monetizing Gemini in several ways. For instance, Gemini powers a conversational assistant that automates tasks in Google Workspace applications, and it powers a conversational assistant that accelerates coding projects. Also, Gemini can be fine-tuned and used to build custom generative AI applications.
Investment bank UBS recently published a report (Artificial Intelligence: Sizing and Seizing the Investment Opportunity) that divides the AI value chain into three layers: the enabling layer, the intelligence layer, and the application layer. UBS analysts wrote, "We see the largest near-term opportunities in the enabling layer," which includes semiconductor companies like Nvidia and cloud computing companies like Alphabet.
With that in mind, Wall Street expects Alphabet to grow earnings per share at 17% annually over the next three years, yet shares trade at a relatively inexpensive valuation of 24 times earnings. By comparison, Wall Street expects Microsoft to grow earnings per share at 14% annually, yet the stock commands a relatively pricey valuation of 37 times earnings.
If Alphabet meets those expectations and the market affords the stock the same valuation as Microsoft, it would be a $4 trillion company by the end of 2025. In that context, reaching $3 trillion is easily achievable, and investors should consider buying a position in this stock today.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
