Prediction: This Will Be Nvidia's Stock Price 5 Years From Now

Key Points

• Nvidia built a wide moat around its GPU business.

• The AI infrastructure market is expected to continue to surge over the next five years.

• The company is well positioned to continue to capture a big percentage of this opportunity.

• 10 stocks we like better than Nvidia ›

Nvidia (NASDAQ: NVDA) has gone from powering video games to powering the future. The company is now the backbone of artificial intelligence (AI) infrastructure, and investors have been rewarded as the stock has soared. The key question now is whether that run still has room, or if much of the upside has already been priced in.

I think Nvidia is just getting started, and that the stock has plenty of upside over the next five years.

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An AI giant

Nvidia's dominance isn't just about the powerful chips it's designed; it's about the ecosystem it's built around them. Nvidia originally created graphics processing units (GPUs) as a way to speed up graphics rendering in video games, but in order to try to expand their use into other markets, it developed a software platform called CUDA that allowed its chips to be programmed for other purposes.

The uptake of GPUs in other markets was slow, but the company made the smart decision to push the platform into universities and research labs, which is where early AI development was being done. This led to a generation of developers being trained on its technology, and most AI software code being written using CUDA.

When AI eventually went mainstream, CUDA already had a huge amount of libraries and tools written on top of it to help improve the performance of its chips for AI tasks. This created a wide moat, as switching to a rival would require rewriting massive amounts of code and retraining developers. That's a big reason why Nvidia had a whopping 94% market share in GPU chips in Q2 and why its position is so hard to disrupt.

Nvidia also saw early on that simply having great chips wouldn't be enough. It created a proprietary interconnect system called NVLink that allows multiple of its GPUs to operate together as a single unit, which is essential for training the ever-larger AI models being developed today. Its 2020 acquisition of Mellanox, meanwhile, expanded its data center networking capabilities, and is the reason why today the company can offer customers complete end-to-end AI factories. While Nvidia's GPUs get all the press, last quarter its data center growth was driven by its networking revenue, which nearly doubled to $7.3 billion.

AI spending is not slowing down, and neither is Nvidia. The company estimates that the AI infrastructure market could grow from roughly $600 billion today to as much as $4 trillion in the next several years. Cloud computing providers are still racing to add capacity, and demand for chips to handle inference, the ones that power AI applications once they are trained, is only just beginning. Nvidia is positioned to benefit from both training and inference demand, which could make its current revenue run rate look small a few years from now.

That said, there are risks. The company's edge in inference is not quite as big as it is for training, which opens the door for more custom chip usage and for rival Advanced Micro Devices to take some share. For now, though, Nvidia's technology lead and software moat give it a powerful advantage that won't be easy to unseat.

Image source: Getty Images.

Nvidia's five-year outlook

Nvidia has implied it could continue to grow revenue at a 50% compound annual growth rate (CAGR). The revenue consensus for its current fiscal year ending in January is around $206 billion. At that pace of growth, its 2028 revenue (essentially its fiscal year 2029 ending in January) would be around $700 billion. From there, let's assume revenue growth slows to 35% for fiscal 2030 and then 25% for fiscal 2031.

If the company's adjusted operating expenses increased an average of 7% quarter over quarter through 2030 (fiscal 2031) and its gross margin remained around 73%, and we apply a 15% tax rate on its operating income, Nvidia could generate over $660 billion in adjusted earnings by 2030 (fiscal 2031), or $27 per share, at its current share count of 24.5 billion. Place a 20 times to 25 times price-to-earnings ratio (P/E) multiple on the stock, and its share price would be between $540 and $675 in five years.

Below is a basic model of what its revenue and earnings growth would look like.

Estimates based on author calculations.

Nvidia's stock still has plenty of room to run over the new five years, and there is the possibility it could still triple from here to $600 or more (it currently trades around $175 a share). While there are risks, it still has huge upside potential.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.