There is no doubt that the markets went overboard on the AI investment theme. Bank of America (NYSE:BAC) recently opined that “AI investment cycle will likely roll on” but “AI hype days are over.” I agree with this view and I believe that the markets will focus on the numbers more than the narrative building in the coming quarters. In some sense, it can be said that the “hype premium” will be shaved-off from the valuation of some of the high-flying AI stocks. Nvidia (NASDAQ:NVDA) has been the hottest AI stock and has created immense wealth in the last 18 to 24 months. Investors everywhere have invested in Nvidia stock.
However, adjusted for split, NVDA stock has corrected by 26% from all-time highs. It’s likely that there will be another 10% to 15% correction in Nvidia stock as some money flows out of the AI theme. I would however consider gradual accumulation in the coming quarters.
With the wider adoption of AI globally, Nvidia has ample headroom for growth. Nvidia currently has a market valuation of $2.55 trillion. I would not be surprised if Nvidia is among the first few companies to breach the $10 trillion valuation market.
The Big Impact of Artificial Intelligence
To understand the reason to remain bullish on Nvidia stock, it’s important to look at the potential AI holds in the next five to seven years.
According to PricewaterhouseCoopers, AI is likely to contribute $15.7 trillion to the global economy by 2030. Chris Hyzy, the CIO at Merrill, and Bank of America Private Bank rightly opines that “AI is going to transform the global economy as surely as electricity and the steam engine did in their own times.”
If the big adoption of AI is due in the next few years, Nvidia is best positioned to benefit. To put things into perspective, global revenue from AI software, hardware, services, and sales was $318 billion in 2020. It’s likely to increase to $900 billion by 2026. I would not be surprising if the market size is in the range of $1.5 trillion to $2 trillion by 2030.
The bottom-line is that Nvidia is positioned to grow at a robust pace. A forward P/E of 37.9 does not indicate that the stock valuation is euphoric. The recent correction is therefore a good entry opportunity.
Cash Flows Justify Valuations
For Q1 2024, Nvidia reported 262% year-on-year growth in revenue to $26 billion. For the same period, the AI company reported operating cash flow of $15.3 billion. With annual revenue estimated at $120.7 billion, Nvidia is positioned to report OCF of more than $60 billion.
Further, for FY2026, analysts estimate Nvidia to deliver revenue of $164.8 billion. Given the growth momentum and EBITDA margin, the company is likely to witness annual OCF of more than $100 billion in the next 18 to 24 months. This will position Nvidia to continue aggressively investing in R&D and stay ahead of the curve.
For now, data center remains the key growth driver. It’s worth noting that the automotive and healthcare segment do not contribute significantly to revenue. However, AI is likely to have a big impact in these sectors. This provides Nvidia with ample headroom for growth and sustained cash flow upside.
To put things into perspective, analysts at Fundstrat Global Advisors believe that Nvidia “revenue can surge tenfold from here and hit $1 trillion by the end of the decade.” Considering the current cash conversion ratio, OCF can be more than $500 billion.
The Bottom Line: Heading Towards $10 Trillion Valuation
I/O Fund tech analyst Beth Kindig believes that Nvidia stock will hit a $10 trillion market valuation by 2030. To achieve this, the stock needs to quadruple from current levels. I would tend to agree with this view considering the innovation edge and revenue upside potential.
Nvidia’s technology edge is evident from the fact that the company controls 80% of the high-end AI chip market. That’s unlikely to change with Nvidia staying ahead of the curve. As an example, the company is focusing on the custom chip opportunity with a market potential of $30 billion.
Nvidia stock is therefore attractive for the long term and I expect significant wealth creation. Gradual accumulation can be considered in the next few quarters as the stock consolidates before the next big move.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
