Nvidia (NASDAQ: NVDA) and Microsoft (NASDAQ: MSFT) stand out as two of the most prominent artificial intelligence (AI) stocks in the current market landscape. Nvidia’s top-tier GPUs play a pivotal role in handling intricate AI tasks within data centers, while Microsoft has made substantial investments in OpenAI. Notably, Microsoft has seamlessly integrated OpenAI’s innovative generative AI tools into its cloud services, search functions, and productivity applications.
Over the recent three-year period, Nvidia has witnessed a remarkable surge of over 600% in its stock performance, overshadowing Microsoft’s more modest 70% rally. This trend positions Nvidia as the frontrunner in the flourishing AI market. However, the question arises: can Nvidia sustain this outperformance against Microsoft in the coming years?
Nvidia: Leading the AI Charge
In the fiscal year 2024, concluding in January, Nvidia experienced a substantial revenue spike of 126%, amounting to $60.9 billion, accompanied by a remarkable 288% surge in adjusted earnings per share (EPS). This growth trajectory marked a stark contrast to the stagnant revenue and 25% decline in adjusted EPS witnessed in fiscal 2023.
The challenges faced by Nvidia in fiscal 2023, including a slowdown in the PC market post-pandemic and the crypto market downturn impacting gaming GPU sales, were notably overcome in fiscal 2024. The increasing popularity of platforms like ChatGPT fueled a surge in demand for data center GPUs, while gaming GPU sales stabilized in the latter half of the year alongside the recoveries in the PC and crypto markets.
Notably, a significant 78% of Nvidia’s revenue in fiscal 2024 stemmed from data center GPUs, with demand continuing to outstrip supply by a considerable margin. Analysts project a compound annual growth rate (CAGR) of 35% for revenue and 39% for EPS from fiscal 2024 to fiscal 2027. Despite these impressive growth rates, Nvidia’s stock valuation remains relatively reasonable at 39 times forward earnings.
While Nvidia appears well-positioned to capitalize on the generative AI market’s growth, challenges loom on the horizon. Competitors like AMD are introducing cost-effective data center GPUs, cloud giants are developing proprietary chips, and new entrants are innovating faster dedicated chips for processing natural language queries. Additionally, Chinese chipmakers may introduce alternative AI chips to counter export restrictions on Nvidia’s premium offerings.
Microsoft: A Diversified AI Player
Microsoft boasts a diversified portfolio spanning Windows OS, Office suite, Azure cloud platform, Bing search engine, Xbox gaming segment, and Surface hardware devices. In fiscal 2023, revenue and adjusted EPS both rose by 7%, driven by the robust expansion of its cloud business—encompassing Azure, Microsoft 365, and Dynamics 365. This growth offset the slower performance of its Windows, Surface, and Xbox divisions, facing headwinds post-pandemic.
Analysts anticipate a 15% revenue increase and a 19% rise in adjusted EPS for Microsoft in fiscal 2024, fueled by accelerated growth in its cloud business. The integration of OpenAI’s generative AI tools into Microsoft’s cloud services has been a key driver of this growth. Consequently, Microsoft’s Azure, the world’s second-largest cloud platform, is outpacing competitors like Amazon Web Services (AWS) and Google Cloud.
Projections suggest a 14% revenue CAGR and a 16% EPS CAGR for Microsoft from fiscal 2024 to fiscal 2026, with expectations of continued cloud expansion, PC market recovery, and enhanced gaming division following the Activision Blizzard acquisition. While Microsoft presents a solid opportunity to benefit from cloud, AI, and gaming market expansions, its stock valuation stands at a premium of 30 times next year’s earnings. Any slowdown in the cloud business momentum or regulatory challenges related to OpenAI investments could potentially impact Microsoft’s valuation.
The Superior AI Investment: Nvidia
Both Nvidia and Microsoft offer promising prospects in the AI market. However, Nvidia’s straightforward business model, robust growth rates, and relatively attractive valuations position it as the preferred investment choice. While Nvidia investors should monitor competitive and regulatory headwinds, the company’s growth trajectory remains largely unhindered for the foreseeable future.
Nvidia continues to provide cutting-edge tools for the AI gold rush, potentially surpassing Microsoft in market capitalization within a few years.
Is Investing in Nvidia Worthwhile?
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*As of March 8, 2024, Stock Advisor returns John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, serves on The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is also on The Motley Fool’s board of directors. Leo Sun holds positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft, and Nvidia. Additionally, The Motley Fool recommends the following options: long January 2026 \(395 calls on Microsoft and short January 2026 \)405 calls on Microsoft. The Motley Fool upholds a disclosure policy.
