Nvidia's Market Cap Could Reach a Shockingly High Level, According to 1 Metric. But Is This Really Possible?

Nvidia (NASDAQ: NVDA) reached a major milestone last year. The artificial intelligence (AI) chip giant's market value roared past $4 trillion: When it did this, it became the first ever to reach that level, and therefore, it also became the world's biggest company. Nvidia slipped ahead of both Microsoft and Apple, tech giants that have each been No. 1 in terms of market value in recent years.

In spite of a lackluster start to the year, Nvidia has managed to keep this lead. This is because its big tech rivals and peers also struggled in the tough market environment. Investors fled growth stocks, particularly AI players, amid general worries -- such as concerns about conflict in Iran -- and as they questioned whether the AI story would indeed be as profitable as expected.

As the second quarter begins, however, the path is looking smoother for tech players. They've rebounded amid optimism that leaders will resume negotiations regarding the war in Iran. And investors are focusing on upcoming earnings reports, which may offer certain tech players a lift.

So now, as Nvidia begins to climb higher once again, it's a great time to consider the company's future market cap potential. One metric even says Nvidia's market value could reach a shockingly high level -- but is this really possible? Let's find out.

Image source: Getty Images.

Nvidia's path to $4 trillion

First, let's take a look at Nvidia's path to $4 trillion and its growth prospects. The company is the world's leading AI chip designer, and this business has helped revenue increase in the double and triple digits in recent years. Profitability on sales has also been solid, as shown by the company's gross margin of more than 70%.

Nvidia hasn't stuck only with chips, and instead has broadened its offering to include complete systems -- from networking equipment to enterprise software. With a pledge to update its technology and a penchant for partnerships to strengthen its market position, Nvidia has become an AI mammoth.

Gains in earnings may be far from over since top-performing chips are needed to power the use of AI, and this should actually represent a new era of growth for Nvidia. The average analyst estimate calls for Nvidia's revenue to surge more than 72% year over year to about $370 billion in the current fiscal year.

Considering all of this, investors have been wondering how high Nvidia's market value may climb. Levels such as $5 trillion or $7 trillion, possibly attainable over the coming years, have been mentioned by analysts.

A fresh look at valuation

But just recently, one analyst took predictions to a whole new level. Analyst John Talbott of UBS said UBS' proprietary HOLT valuation model shows that Nvidia's stock price should be 400% higher -- and that would bring market value to a mind-boggling $22 trillion.

The HOLT method is based on cash flow return on investment (CFROI) -- this considers a company's returns on its investments over a one-year period. CFROI measures returns while considering the cost of capital, and it takes into account inflation, too.

The HOLT model is showing Nvidia with a CFROI of 73% -- that's compared to an average of 6% for a company that isn't in the financial sector. Importantly, Nvidia is also ahead of the pack when it comes to "return fade," or the diminishing of returns as competition in the industry increases. Nvidia isn't experiencing this.

All of this, through the UBS HOLT method, suggests Nvidia's valuation should be $22 trillion. Now the question is: Is this really possible?

One key fact makes it very unlikely that Nvidia will reach this level any time soon: The entire market value of the S&P 500 today is about $64 trillion. If Nvidia were to reach $22 trillion, it would represent more than a third of the entire index. That idea, alone, means an increase to this level probably isn't in the cards.

That said, the HOLT model does show us something extremely valuable: Nvidia's investments are paying off -- and competition isn't weighing on business. Meanwhile, a classic valuation method is showing that Nvidia stock, even if it doesn't climb 400% in the near future, still has plenty of room to run. The stock is trading for only 23x forward earnings estimates, a steal considering Nvidia's market position and prospects. All of this means that Nvidia could continue to reach exciting market cap milestones as this AI boom marches on.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia and is short shares of Apple. The Motley Fool has a disclosure policy.