A Trillion Dollars Is a Huge Amount of Money. That’s Why Investors Are Likely to Value a Select Few Companies at $1 Trillion or More, as Their Profits Will Grow Rapidly in the Coming Decade.

Here’s why Nvidia and Tesla are likely to take their place among the world’s most valuable companies.

Nvidia (NVDA)

Many of the largest and most important technology markets in the world today are powered by Nvidia semiconductors. Nvidia chips are leading the competition in industries such as robotics, cloud computing, gaming and automotive.

The emerging artificial intelligence (AI) market appears as the most powerful driver of Nvidia’s growth. Indeed, AI applications, including the popular ChatGPT app, use Nvidia chips to train their models. This is a fast-growing and potentially massive market, with Grand View Research reporting that Nvidia will exceed $100 billion in annual revenue by 2030.

Yet AI represents only a part of Nvidia’s total addressable market. Combined with its gaming, automotive, metaverse and other segments, the company estimates its long-term market opportunity at $1 trillion. In its fiscal year 2023, Nvidia generated $27 billion in revenue and $4.4 billion in net income. This leaves the company with plenty of room for expansion in the coming years.

Wall Street, for its part, expects the company’s profits to grow by more than 21% a year over the next half-decade. Even if the chipmaker’s profits slow to 15% per year over the next five years, its net income would return to about $23 billion.

For Nvidia to be valued at $1 trillion its stock would have to trade at about 43 times earnings. For context, at its current market capitalization of roughly $585 billion, Nvidia trades at 133 times trailing earnings and 53 times future estimates.

Tesla (TSLA)

Tesla (TSLA 7.82%), like Nvidia, is an emerging market leader. The electric vehicle (EV) industry is poised to grow exponentially in the coming decade, and the dominant EV manufacturer is likely to benefit from this trend more than any other company.

Ark Investment Management expects EV sales to grow by 50% per year to 60 million units by 2027, as falling battery costs make it possible to lower car prices. If Ark’s forecast proves accurate, Tesla will have a long growth trajectory ahead. The automaker projects that 1.8 million vehicles will be produced this year, up from 1.3 million in 2022.

Elon Musk, CEO of Tesla, wants to sell 20 million EVs per year by 2030. If the company succeeds, Tesla would represent nearly 20% of automotive sales at that time. Musk wants to achieve this with a limited number of car models, he is considering ten.

By the end of this year, the company is set to begin production of the anticipated Cybertruck electric truck. Tesla reports that there are already hundreds of thousands of reservations for it, and the company expects it to be a strong sales item. Reservations are also being taken for the Roadster sports car, but with a projected price of around $200,000, sales of the new EV will likely be limited.

Keeping the number of models limited to 10 would allow Tesla to spend less on development costs and deploy a more consolidated production network. This strategy could boost Tesla’s already impressive profit margins.

The EV giant’s revenues grew 51% to $81.5 billion in 2022, while its net income rose 128% to $12.6 billion. According to analysts, Tesla’s growth will moderate, given the significant resources it is spending to expand its production network. But if the company can increase its profits by 12% annually over the next decade, Tesla’s net income would rise to a whopping $39 billion.

The company’s stock must trade at roughly 26 times earnings for Tesla to be valued at $1 trillion at that time. For perspective, Tesla stock currently trades at about 45 times trailing earnings at a current market value of $639 billion.

It’s worth noting that many investors are concerned Musk’s recent purchase of Twitter and his efforts to stabilize the company’s finances could diminish his ability to lead Tesla into the future. However, Musk has said that he plans to find a Twitter CEO to replace him by the end of this year, which would allow him to focus more on Tesla.