Nvidia (NASDAQ:NVDA) has been on a roll the past year, with NVDA stock gaining 82% through Aug. 10. That’s despite the UK approval of its $40 billion acquisition of Arm being too close to call.
I got the idea for this article from a headline that wondered if Nvidia would hit a $1 trillion valuation by 2025. If it doesn’t, I’d be incredibly shocked. That’s because it only requires a compound annual growth rate of 23.3% over the next 41 months to double its current market capitalization of $506 billion by Jan. 1, 2025.
So, for kicks and giggles, I’m going to contemplate the likelihood of Nvidia joining the trillion-dollar club by Halloween 2022. If it did, shareholders would certainly be able to buy a lot of candy for trick-or-treaters.
Let’s consider the possibilities.
NVDA Stock and Halloween 2022
You’re probably wondering how I came up with such an obscure goal.
Well, as I said earlier, Nvidia currently has a market cap of $506 billion. Over the past year, NVDA stock is up 82%. I’ve assumed it repeats this feat by August 2022. That gets us to $920 billion. Keeping up the same pace, it would take about 2.3 months to hit $1 trillion.
Oct. 10, 2022, would be two months. The 0.3 months would get us close to Halloween, give or take a few days.
So, as I often like to say, investing is about probabilities. There are best-case, worst-case, and most likely scenarios.
The Best-Case Scenario
Nvidia currently trades at 27x sales, almost double its five-year average. So, for starters, it would have to maintain this higher multiple to have any chance.
According to the terms of the Arm acquisition, Nvidia will issue 44.3 million shares as partial payment for the deal. It will also include $12 billion in cash and a possible additional $5 billion earn-out for SoftBank Group (OTCMKTS:SFTBY), Arm’s current owners.
But for now, we’re only concerned with the 44.3 million shares. Add it to the 623 million outstanding as of May 2, and you get 667.3 million. However, on July 20, Nvidia’s stock split 4-for-1, creating a new total (including Arm) of 2.67 billion. Divide that into $1 trillion, and you get a share price of $374.53.
However, it’s possible that once the transaction takes place and the shares are issued to SoftBank, the stock moves lower.
Nvidia’s trailing 12-month (TTM) sales are $19.3 billion. Add in approximately $2 billion for Arm’s annual sales, and you get $21.3 billion. I’ve seen a forecast of $24.4 billion mentioned online for the combined businesses. Let’s go with that. Multiplied by 27 and you get $659 billion.
So, in a best-case scenario, one of two things has to happen: 1) the combined entities hit TTM sales of $37 billion by Halloween 2022, or 2) its price-to-sales multiple increases to approximately 41x [$1 trillion divided by $24.4 billion in revenue].
Clearly, the second option is more likely. But it’s a stretch.
The Worst-Case Scenario
As I said earlier, the possibility of Nvidia’s Arm deal getting nixed by UK regulators is real. However, InvestorPlace’s Mark Hake suggested that investors shouldn’t be scared off by the existing doubts about the deal going through at the end of July.
“[I]f the deal begins to falter and the companies cannot close the transaction, NVDA stock could take an even bigger hit. But that would be an opportunity to get the stock cheaply for most serious long-term investors. The reason is clear. Nvidia is a free cash flow (FCF) powerhouse,” Hake stated on July 29.
It is indeed.
In June 2019, I argued that free cash flow made NVDA stock a buy on the dip in price. It’s up 464% in the 26 months since.
Let’s assume that NVDA stock falls by 20% on the official announcement the Arm deal is off, which puts its share price around $163 and valuation of $405 billion or 21x sales, its multiple in 2020.
As my colleague suggests, at that point, you should be buying.
The Most Likely Scenario
Despite the rumblings of the ARM deal not getting done, I believe that the company will do everything in its power to appease any concerns about security nations such as the United Kingdom might have with the transfer of ownership from a Japanese company to one based in the U.S.
It’s got until September 2022 to bring the acquisition home, the date at which time either party can walk away from the deal. Fortunately, Nvidia’s business doesn’t appear to be distracted by its work to complete the acquisition.
Jensen Huang is one of the best CEOs in tech. With or without Arm, Nvidia will continue to grow its business and its share price.
Will Nvidia join the trillion-dollar club in Halloween 2022? I doubt it. Instead, buy it expecting it to reach the Holy Grail of valuations sometime in 2023.
Long-term, it remains one of my favorite buys, and I’m not even a tech geek.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.