It’s taken Nvidia (NASDAQ: NVDA) roughly seven months to double in value. The stock also doubled in the seven months before then. I think it’s highly unlikely that Nvidia will deliver another 100% return over the next seven months.

However, put more time on the clock, and we could have a different ballgame. Here’s exactly what it will take for Nvidia stock to double again over the next five years.

The most important factor that will determine whether or not Nvidia stock doubles within five years is the law of supply and demand. In a nutshell, this law states that if supply falls and/or demand increases, prices will rise – and vice versa. In Nvidia’s case, the supply and demand for its stock are directly linked to the supply and demand of its graphics processing units (GPUs).

Let’s talk first about the demand side of the equation.

The biggest driver of demand for Nvidia’s GPUs over the next five years will almost certainly be artificial intelligence (AI). Market researcher Markets and Markets projects the global AI chip market will increase by a compound annual growth rate of 20.8%. Another market researcher, The Brainy Insights, expects a CAGR of nearly 38.2%.

Even if we use the lower estimate, the demand for Nvidia’s GPUs would soar more than 250% over the next five years. All the company has to do is at least keep pace with the overall AI chip market. Considering Nvidia’s commanding position in the market now, that shouldn’t be a problem.

But is the level of growth for the AI chip market predicted by market researchers realistic? I think so. Generative AI and autonomous ride-hailing services are only in their early stages. Both should continue to grow rapidly over the next few years. Also, don’t rule out the possibility of major breakthroughs in artificial general intelligence (AGI) that drive increased demand for powerful AI chips.

Now, let’s address the supply side.

The economics for Nvidia are simple: As long as there aren’t enough viable alternative suppliers of AI chips to meet customers’ needs, Nvidia’s GPUs will dominate the market. I suspect this could be more of a challenge for Nvidia than demand growth.

Multiple companies are angling to take away market share from Nvidia. Advanced Micro Devices and Intel have launched new AI chips that they argue are more cost-effective than Nvidia’s flagship H100 GPU. Several of Nvidia’s big customers have developed their own chips to reduce their reliance on Nvidia, including Google parent Alphabet , and Amazon .

However, increased competition doesn’t mean Nvidia’s share price can’t double over the next five years. As long as demand for Nvidia’s GPUs grows fast enough, how much market share rivals take is irrelevant.

The best way for Nvidia to keep its chips on top is to out-innovate everyone else. Nvidia is clearly trying to do this, as evidenced by the recent introduction of its next-generation Blackwell platform the company says can “run real-time generative AI on trillion-parameter large language models at up to 25x less cost and energy consumption than its predecessor.”

I’ve intentionally left out of the discussion what’s arguably the biggest obstacle to Nvidia’s chances of doubling over the next five years. It’s valuation. Nvidia’s shares currently trade at 35.6 times sales. This multiple reflects expectations of a lot of growth.

NYU finance professor Aswath Damodaran, known as the “Dean of Valuation,” thinks Nvidia’s fair value assuming a revenue CAGR of 32% over the next five years is $436. Nvidia’s current share price is more than twice that amount. If Damodaran is right, Nvidia stock is more likely to be halved than it is to double over the next five years. However, Damodaran readily admits that he could be underestimating the demand for Nvidia’s chips.

One critical ingredient isn’t always incorporated in valuation models, though — investors’ expectations of growth beyond the time horizon used by the models. I think Nvidia stock will double over the next five years if the demand for its GPUs exceeds estimates, the company out-innovates its rivals, and investors think those trends will continue well beyond five years into the future.

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Here’s Exactly What It Will Take for Nvidia Stock to Double Again Over the Next 5 Years was originally published by The Motley Fool

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