Nvidia’s Stock Soars Amid AI Boom: Can It Reach $5 Trillion by 2026?

The AI boom has propelled Nvidia (NASDAQ: NVDA) to unprecedented heights, with a market capitalization of $3.38 trillion, making it second only to Apple today.

Wall Street analysts predict that Nvidia’s stock could climb even higher, potentially reaching a $5 trillion valuation by 2026. This article explores the reasons behind this optimism, as well as potential challenges that could impede this upward trajectory.

The Case for Nvidia: Growth Drivers and Market Dominance

Nvidia’s growing presence in the AI sector has drawn both enthusiasm and skepticism. Supporters argue that the AI revolution is not only real but also expanding significantly, asserting that Nvidia will maintain its leadership position while continuing to generate strong profits.

Several recent forecasts point to significant growth in the industry. For instance, Advanced Micro Devices (NASDAQ: AMD) CEO Lisa Su recently projected that the AI data center chip market could reach $500 billion by 2028, after being valued at just $45 billion in 2023. Additionally, Wall Street banks have reported that Nvidia’s new Blackwell chip is sold out for the next year.

In June, boutique firm Rosenblatt raised its price target for Nvidia from $140 to $200, the highest forecast available. This target is closely aligned with a potential $5 trillion market cap. Wall Street analysts generally offer price targets based on expected performance within the upcoming year.

The new Blackwell chip has fueled optimism among analysts, who believe that demand for Nvidia’s technology will remain strong, especially with the anticipated launch of the Rubin chip in late 2025 or early 2026. It is worth noting that Nvidia announced plans to accelerate the introduction of new chip architectures from a two-year schedule to an annual one.

However, reaching a $5 trillion valuation isn’t solely about growing earnings; Nvidia must also maintain a high market multiple. Rosenblatt notes that Nvidia’s diversification into non-chip products will help sustain its growth. The company has evolved into a full systems provider, offering networking infrastructure and complete data center designs, along with new software solutions tailored for AI applications.

As software revenue generally commands higher valuations than cyclical chip earnings, Rosenblatt expects Nvidia’s increasing software mix to uphold its elevated price-to-earnings (P/E) ratio.

Recently, Bank of America raised its Nvidia target from $165 to $190. Analyst Vivek Arya expressed confidence that Nvidia’s free cash flow margins and growth could sustain itself into the following year, projecting over $200 billion in revenue during this time. Arya also highlighted new partnerships with major enterprises like Accenture, which could further solidify Nvidia’s stronghold in the market.

Image source: Getty Images.

Potential Hurdles on the Path to $5 Trillion

For Nvidia investors, significant risks stem from doubts about the persistence of AI’s benefits and the company’s competitive edges.

Most tech executives affirm the AI revolution is unlikely to slow down. However, large cloud companies could reassess their AI investments if returns do not materialize. Even so, most are likely to continue investing out of fear of missing out on advancements. Without an economic downturn—something that seems unlikely given the current strength of the U.S. economy and low unemployment rates—it appears investors need not worry about a significant drop in revenues.

Increasing competition may pose a more imminent threat to Nvidia. The tech giant has built a significant advantage over the years with its CUDA software, which has been developed over the past 15 years. Yet, prominent tech companies are now exploring open-source alternatives like PyTorch and TensorFlow, working towards a future where CUDA can be replaced with more universally applicable programming that’s compatible with various chips.

Alternative options are growing, with AMD’s MI300 GPU line becoming more accessible, and many large cloud firms developing in-house custom accelerators. These developments could put pricing pressure on Nvidia’s premium chips. It’s uncommon for a chip company to sustain gross margins in the mid-70% range, especially when such high-priced products are being purchased in large volumes.

NVDA Gross Profit Margin data by YCharts

Another concern involves the industry’s shift from training large models in the cloud to utilizing lower-cost chips for inferencing tasks. Once models are trained, customized ASICs and some CPUs can be leveraged for inferencing, particularly for smaller models. Businesses may opt for the most cost-effective solutions available, which may or may not involve Nvidia, especially since many anticipate that the inferencing market will overshadow the training sector.

Adapting to a Dynamic AI Market

It remains uncertain whether Nvidia will maintain its advantage as the rapidly evolving AI landscape continues to progress.

The market seems to be diverging, with super-high-end training for artificial general intelligence on one end, where Nvidia is likely to sustain its lead, and more affordable, everyday inferencing applications on the other. Investors should stay informed about ongoing advancements in AI and be willing to adjust their perspectives in response to emerging data.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein and/or his clients have positions in Apple and Bank of America. The Motley Fool has positions in and recommends Accenture Plc, Advanced Micro Devices, Apple, Bank of America, and Nvidia. The Motley Fool recommends the following options: long January 2025 $290 calls on Accenture Plc and short January 2025 $310 calls on Accenture Plc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.