This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Shares of chipmaker Nvidia (NASDAQ: NVDA) have soared more than 2,400% in just the past five years. The stock has proven to be a growth machine due to advancements in artificial intelligence (AI) and the importance the company's chips play in next-gen technologies.
But with the company now among the most valuable in the world and amassing such incredible gains, is it too late to invest in Nvidia? Can this still be an exceptional long-term investment, one that could potentially turn a $25,000 investment into more than $1 million over the long haul?
Why investors can remain bullish on Nvidia
Investing in a stock that has already achieved such out-of-this-world returns as Nvidia will discourage many investors. After all, if it has climbed by so much so quickly, you may be wondering just how much more upside it can have.
But if you're bullish on AI, there's reason to be optimistic that Nvidia can continue to rally. And that's because it dominates the AI chip market; its share of the market is north of 70%, and many companies developing AI models need to turn to Nvidia.
Even as other tech companies are building out custom chips, demand remains robust for Nvidia. There's no better proof of that than by looking at the numbers; Nvidia's growth rate remains impressive.
NVDA Operating Revenue (Quarterly YoY Growth) data by YCharts
While its growth rate has come down a bit, it would be hard for any company to continue tripling its sales. But averaging an annual growth rate of about 80% during a five-year period is astounding.
And what's promising is that AI demand may remain strong for years. Analysts at Grand View Research project that the AI chipset market could be worth $323 billion by 2030, estimating that it will expand at a compound annual growth rate (CAGR) of 28.9% until then. Nvidia is a key benefactor of those growth opportunities, and as a result, there could still be much more room for the business to become even more valuable in the future.
Can Nvidia's stock be a 40-bagger investment?
There's no doubt Nvidia can become much more valuable in the future. But the big question is whether it can produce 40-fold returns, because that would be needed for the stock to turn a $25,000 investment into at least $1 million. To put that into perspective, consider whether you think Nvidia may one day be worth about $150 trillion — 40 times its current market cap.
That likely won't happen anytime soon, but when you're talking about a period of 20-plus years, that includes a lot of future growth. Nvidia's stock would need to generate an average return of about 20.3% for it to grow to such a valuation. If you're looking at a period of 25 years, then the growth rate would need to be a bit lighter at 15.9%.
Such a growth rate may be more manageable, but it still involves Nvidia completely dominating and outperforming the market — the S&P 500's long-run average is an annual return of about 10%. Whether you think that is a realistic scenario depends heavily on your expectations for AI. If companies are going to spend feverishly on new technologies and Nvidia remains a top AI vendor, it's definitely possible.
Personally, I'm a bit more sceptical about the hype in AI and expect that many companies may not see the value in developing their own AI chatbots and models. The potential for this to be another tech bubble is why I'd be more cautious in expecting sky-high returns for Nvidia over the long run. I'm also not convinced the business is just going to continually generate fantastic numbers for decades, and that it can produce 40-fold returns for investors.
Nvidia may still be worth investing in anyway
Even if Nvidia may not have what it takes to be a millionaire-making investment in the long run, that doesn't mean it can't still be a good investment to add to your portfolio today. It's growing at a fast rate, and its valuation isn't egregious; it's trading at less than 60 times its trailing earnings, which may not be all that outlandish for a company generating the type of growth Nvidia is.
It's a top business to invest in, but investors should temper their expectations. While Nvidia has produced some terrific gains in recent years, that doesn't mean the trend is simply going to continue for the long term. Nvidia can be a good growth stock to buy and hold, but I don't think it's going to generate life-changing returns for investors who buy it today.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
