No. of Recommendations: 4
Why are none of the writers moved to comment on the Nvidia board? Seems anomalous.
I'll take a stab. I don't for a moment believe the numbers will pan out in this way, and it is just like drawing some circles in the sand to try to get some perspective as to what could happen.
Allied Market Research are estimating global AI chip market to grow from $22 billion to $384 billion from 2024 to 2034. I imagine such a figure is extremely random and unpredictable, given that very few firms could predict the market today when looking at it from 2014, but I do not have much insight so I'll just assume that actually occurs. We can create a few other assumptions for the next 10 years:
1. With Nvidia maintaining its present margins, PE multiple, and market share, then you would receive investment return matching the industry sales growth of 384/22 = 17x over 10 years. But competition is going to enter, so let's also assume:
2. Competition: Nvidia's "AI chip" market share falls from the present 94% market share down to 47% (a fall of 50%) as rivals get involved - in ways I absolutely cannot predict. Even that could be hard to maintain over 10 years given the ludicrous excitement around AI. That reduces the 17x return to 8.5x.
3. Profitability: At the end of the 10 years Nvidia trades at a 35% net margin rather than the present 50% net margin, with the present massive pricing power from huge demand eventually calming down as competition and supply gradually gets under control. That is still a high margin, but also a fall of 30%, reducing the return to 6x. (The margin could of course end up lower than 30% after 10 years - keep in mind the AMD has been trading close to a zero margin for years and Intel's margins haze averaged around 18% prior to falling just recently.)
4. Valuation multiple: Nvidia is presently trading at a 70x multiple. Let's assume after 10 years - with the competition having a chance to catch up, spread, and take new forms - that Nvidia trades at a PE of 30x. That is fall of 57% which takes the 6x return to 2.6x.
That would give a 10 year CAGR of 2.6^.1 = 10%.
Don't take this any more than a hypothetical story, having the only strength that logic is maintained for the relationship between the numbers. I have no insight into the AI chip industry and just putting together one story.
- Manlobbi
