The Path from $1 Trillion to a $2 Trillion Market Cap Will be Harder for Generative AI Star Nvidia

2023 has seen leading chipmaker Nvidia [NASDAQ: NVDA] embark on an extraordinary journey into an exclusive club of $1 trillion companies on Wall Street. But with fresh challenges looming on the horizon, is the stock ready to build on its recent performance?

Thanks to a whirlwind price rally throughout the first half of 2023, Nvidia became just the ninth company to reach a market capitalization of $1 trillion and is currently one of six firms alongside Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), and Saudi Aramco to hold a 13-figure value.

\Nvidia’s growth, buoyed by the generative AI boom, has been nothing short of exceptional. Peaking at 244% growth in Q3, the stock has since undergone a correction before recovering much of its lost value in time for Q4 2023 in a strong show of resilience.

Such extraordinary growth came as the result of a conscious shift towards anticipating the artificial intelligence boom, which was sparked by the launch of OpenAI’s ChatGPT large language model (LLM) in late 2022.

“We had the good wisdom to go put the whole company behind it,” explained Jensen Huang, CEO of Nvidia, in a CNBC interview.

“We saw early on, about a decade or so ago, that this way of doing software could change everything. And we changed the company from the bottom all the way to the top and sideways. Every chip that we made was focused on artificial intelligence.”

Such industry foresight will be music to the ears of Nvidia’s growing mass of investors. The stock’s sustained performance is helping to draw comparisons between Nvidia and Tesla [NASDAQ: TSLA] due to their respective performance built on their commitment to innovation.

However, such comparisons aren’t always productive for stocks and can cause bubbles that swell due to investor complacency.

"Nvidia is the stock market's new Tesla, where the market blindly assigns a ridiculously high and unrealistic valuation," warned David Trainer, corporate finance expert at New Constructs. "We're not denying that Nvidia is a great company, but we are pointing out that its valuation is beyond lofty and unjustifiable."

So, could Nvidia’s newfound Tesla status see the company push towards a $2 trillion valuation in the future? Or is a market correction inevitable? Evidence suggests that the path to $2 trillion is likely to be full of fresh challenges for the star of the generative AI boom.

Dismantling Nvidia’s Monopoly

The reason behind Nvidia’s exceptional market performance is clear. With an estimated 80% global market dominance for the chips most suitable to run generative AI applications, Nvidia’s position within the industry is largely uncontested.

Much of Nvidia’s success has been down to the timely launch of its H100 chip, which has been widely regarded as the best of its kind when powering generative AI and LLM applications.

The H100 chip has been positively received throughout the industry. “During the quarter, major cloud service providers announced massive NVIDIA H100 AI infrastructures,” Huang claimed in a Q2 earnings statement.

“Leading enterprise IT system[s] and software providers announced partnerships to bring NVIDIA AI to every industry. The race is on to adopt generative AI.”

However, there appear to be multiple threats to Nvidia’s generative AI market monopoly that are gathering momentum.

One of Nvidia’s closest competitors, AMD, recently announced the acquisition of Nod.AI, an open-source artificial intelligence software startup, in a bid to compete more directly in AI markets.

Nvidia also appears set to face competition from some of the AI landscape’s leading players. The growth of ChatGPT has directly aided the stock market rally experienced by Nvidia, but with news that ChatGPT’s parent company OpenAI may be considering the development of its own AI chips to cut costs and lower its dependence on Nvidia as well as major investor Microsoft, the days of Nvidia’s AI market dominance may be numbered.

Generative AI’s “Cold Shower”

Nvidia’s rally to a $2 trillion market cap will also be challenged by questions over sustainability as well as the emergence of rivals.

According to a CCS Insight report for the future of tech, analysts expect that the generative AI market “gets a cold shower in 2024” owing to entry costs, risk, and sustainability concerns, which ultimately “replaces the hype” swelling around the transformative technology.

The cost of running ChatGPT is estimated to weigh in at around $700k per day, suggests SemiAnalysis analyst Dylan Patel, and these high barriers to entry are likely to cause more problems across industries as the hype for generative AI subsides and enterprises are faced with a hefty bill for embracing the technology early.

Costs associated with developing AI models can range far higher than traditional software and require the hiring of expensive researchers, buying into market leader Nvidia’s servers, and hiring AI developers who still have to buy the text, image, and knowledge base data required to train models.

In addition to this, growing concerns surrounding the carbon footprint of this extensive chip usage to power generative AI models have called into question the compliance of generative AI adoption for ESG-focused firms.

Could Nvidia Become The Next FAANG Sensation?

Even with considerable challenges on the horizon, Nvidia’s market head start means that the company is well-positioned to continue innovating beyond its rivals and to establish itself in an industry that appears set for sustained long-term growth.

“Factors such as generative artificial intelligence and the metaverse may provide NVIDIA with a FAANG level of popularity,” claims Maxim Manturov, head of investment research at Freedom Finance Europe. “Generative artificial intelligence is a rapidly growing field that has the potential to revolutionize many industries.”

Although short-term volatility may come into play as reality bites for the generative AI boom, Bloomberg Intelligence’s forecast that the industry will attain a $1.3 trillion valuation by 2032, representing a CAGR of 42% over a decade, could become a reality when considering the vast transformative implications of AI for countless global industries.

As for the path towards a $2 trillion market cap, Nvidia would need to double its annual revenue to $54 billion and adjusted net income to $17 billion at respective CAGRs of 10% between 2023 and 2030 to double its current output.

Whether this seemingly achievable level of performance can be reflected in a $2tr capitalization will likely be down to the state of investor appetite for generative AI stocks by the end of the decade.

What we can be sure of is that Nvidia has proven time and again that it’s ready to out-innovate its rivals and capitalize on opportunities long before they materialize. With such a pioneering focus, it seems like anything can be possible for the star of generative AI.