Analysis

3 Mind-Blowing Charts That Explain How Nvidia Got to a $3 Trillion Valuation

Nvidia’s business has been firing on all cylinders.

Nvidia (NVDA -3.22%) has quickly become one of the most valuable stocks in the world. And even with its valuation north of $3 trillion, it still wouldn’t be surprising to see the artificial intelligence (AI) stock rise even higher in the months and years ahead. Nvidia’s success and the reason it can continue to soar higher can be summarized with three incredibly impressive visuals.

Nvidia’s cash flow paves the way for growth opportunities

Free cash flow is an important metric for tech companies and any business that’s focused on growth. It represents how much money a company is generating after factoring in its capital expenditures. This effectively tells investors how much room there is for the company to reinvest in its operations. This can include acquiring a company or developing new products.

NVDA Free Cash Flow (Quarterly) data by YCharts

Nvidia’s free cash flow has exploded in recent quarters. In previous years, the company’s annual cash flow would often come in at less than $5 billion. Now, on a quarterly basis, it’s bringing in around $15 billion. It’s an incredible amount of cash, which opens up plenty of opportunities for Nvidia, which can unlock even more growth potential for this already fast-growing business.

Its growth rate has taken off

It wasn’t all that long ago where Nvidia’s sales were declining on a year-over-year basis. Not only is that no longer a problem, but the big question moving forward is how long the company can continue to triple its top line; its growth rate has been north of 200% for multiple quarters as business has been booming.

NVDA Revenue (Quarterly YoY Growth) Chart

NVDA Revenue (Quarterly YoY Growth) data by YCharts

There’s still plenty of demand for AI chatbots, AI models, and all sorts of next-gen technologies that will require Nvidia’s chips and products. Even if its growth rate does inevitably start to decline, Nvidia’s impressive present growth rate could ensure the stock’s valuation remains elevated for the foreseeable future.

Nvidia has an unbelievably high profit margin

It’s one thing to be generating strong top-line growth, but what’s even more impressive is that Nvidia has been able to do that while also increasing its margins. Currently, its profit margin is north of 50%. This means that for every dollar of revenue it generates, more than fifty cents are going straight to the bottom line. With growth like that, it doesn’t matter that its earnings multiple is high at around 80 because it could come down in a hurry.

NVDA Profit Margin (Quarterly) Chart

NVDA Profit Margin (Quarterly) data by YCharts

Is Nvidia stock still a buy?

Deciding whether to buy Nvidia’s stock can be a challenging proposition. On the one hand, you have an incredibly successful business that is generating fantastic numbers and still has a lot of growth potential. However, you may worry that its valuation has become excessive and that there is a bubble in AI that’s bound to pop, and when that happens, Nvidia’s valuation could tumble.

The worst I can see happening is that investors do pay a smaller premium for Nvidia’s stock, and its shares could fall. But over the long term, with so much potential in AI and for it to affect so many industries, and Nvidia being a leader in AI chips, it’s hard not to like it as a long-term hold. Even if its growth rate slows down and its margins decline, it can still be an excellent growth stock after all of that. As long as you’re willing to hold on for multiple years, then yes, Nvidia can still be a solid stock to buy right now.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

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