Nvidia Could Be the First $22 Trillion Stock, According to 1 Top Analyst. But There's a Big Catch.

Five years ago, Nvidia's (NASDAQ: NVDA) market cap hovered around $390 billion. Today, it's worth almost $4.6 trillion and ranks as the world's largest technology company (and the world's largest company, period) by market cap.

However, one top analyst believes that Nvidia should be valued much higher. UBS' (NYSE: UBS) John Talbott pegs the company's valuation at a whopping $22 trillion. That's not a projection for five or 10 years in the future, by the way; it's what the UBS Holt model assesses Nvidia's true valuation at right now.

If Talbott and his team are right, Nvidia should be the world's first $22 trillion stock. But there's a big catch.

Image source: Nvidia.

$22 trillion isn't a number plucked out of the air

The HOLT model was originally developed in the 1970s and was bought by Credit Suisse in 2002. When UBS acquired Credit Suisse in 2023, it added the tool to its product lineup. At its core, HOLT is a discounted cash flow (DCF) model. It doesn't rely on earnings multiples or analysts' price targets. Instead, the model uses cash flow return on investment (CFROI). UBS believes that CFROI better reflects companies' underlying economics than other metrics.

The average CFROI for non-financial companies is 6%. Nvidia's is 73%. This level ranks the GPU maker in the top 0.1% of all the companies the HOLT model has ever tracked. HOLT also looks at asset growth. Nvidia's asset growth puts it in the top 0.5% of all companies ever tracked in its database.

Nvidia also stands out on another key front. HOLT factors in expected fade in returns for companies. The model assumes that competition will eventually begin to affect a company's growth trajectory. However, the return fade projected for Nvidia hasn't materialized. As a result, HOLT had to increase its long-term return expectations for the company.

Based on all of its underlying data, HOLT calculated Nvidia's valuation at $22 trillion. Talbott acknowledged that many investors are skeptical about this sky-high number. However, Nvidia's CFROI is simply phenomenal. Talbott told The Information, "We've never seen anything like this in our system--it's incredible."

The big catch

The combined market cap of all the companies in the S&P 500 (SNPINDEX: ^GSPC) is around $62 trillion right now. Is Nvidia really worth more than one-third of this amount by itself? I don't think so.

In my view, there's a big catch with HOLT's valuation of Nvidia. UBS points out this catch in its disclaimer for HOLT: "A company's future achieved return on capital or growth rate may differ from HOLT default forecast."

As mentioned previously, the model was forced to revise its long-term return fade projections upward based on the company's recent performance. However, this revision assumes that it will take longer for competition to impact Nvidia. That might not be a safe assumption.

Amazon (NASDAQ: AMZN) CEO Andy Jassy recently wrote to shareholders, "Virtually all AI thus far has been done on Nvidia chips, but a new shift has started." Jassy mentioned how Amazon disrupted Intel (NASDAQ: INTC) in the CPU market. He stated, "The same story arc is now unfolding in AI."

It isn't just Amazon that's developing AI chips that rival Nvidia's. So are Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: META). Broadcom (NASDAQ: AVGO) is helping some of those companies. Advanced Micro Devices (NASDAQ: AMD) and Huawei are also formidable competitors nipping at Nvidia's heels.

The first $22 trillion company?

I'm skeptical that Nvidia is really worth $22 trillion today. However, I wouldn't rule out the possibility that the company could be valued at such a mind-boggling amount someday.

Nvidia continues to rank among the best AI stocks on the market, in my view. Even if it doesn't reach a market cap anywhere near $22 trillion over the next few years, it could still be a big winner for investors.

Keith Speights has positions in Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Broadcom, Intel, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.