Nvidia (NASDAQ: NVDA) has been one of the hottest stocks on the market in recent months, which isn’t surprising considering the company has played a crucial role in the artificial intelligence (AI) revolution.
Companies in the race to develop and deploy AI applications are turning to Nvidia’s graphics processing units (GPUs) to harness the parallel computing power of its chips so they can train large language models (LLMs) like ChatGPT. It turns out that demand for Nvidia’s GPUs is so high that the company is finding it difficult to meet end-market demand, leading to long wait times.
The good news is that Nvidia has increased its production capacity, which explains why the company is expected to deliver another year of solid growth in the 2025 fiscal year (which has just begun). Revenue is expected to grow nearly 84% to $112 billion this fiscal year, while net sales are expected to rise 91% to $24.87 per share. All of this explains why investors have flocked to Nvidia stock, which is already up more than 82% through 2024.
Nvidia seems well positioned to justify its expensive earnings multiple of 75 given the potential growth it could deliver. The sharp rise in future earnings is reflected in a much lower forward price-to-earnings ratio of 37. However, investors who missed Nvidia’s stellar run-up and are wary of paying a rich earnings multiple may want to consider taking a closer look to look at. bee Microsoft (NASDAQ: MSFT).
Like Nvidia, Microsoft is also a major player in the AI market, and it can currently be purchased at a reasonable price. This is why smart investors should consider this right away.
Microsoft shares are attractively valued and AI has a positive impact on growth
Shares of Microsoft are up just 10% so far this year. This explains why the stock can still be bought at a relatively reasonable earnings multiple of around 35, which is much lower than Nvidia’s multiple. Microsoft’s forward earnings multiple of 31 also represents a discount to Nvidia’s.
Of course, Microsoft isn’t growing as fast as Nvidia, but it has consistently exceeded Wall Street earnings expectations in recent quarters and its growth has accelerated.
For example, in the third quarter of fiscal 2024 (which ended March 31), Microsoft’s revenues rose 17% year over year to $61.9 billion. That was a nice acceleration compared to the 7% revenue growth that the company achieved in the same period last year.
Additionally, Microsoft’s earnings growth also improved to 20% year-over-year in the previous quarter, compared to 10% in the year-ago period. AI plays a key role in this acceleration, as Microsoft management noted during its latest earnings conference call. CEO Satya Nadella noted that the company’s Azure cloud platform “gained share as customers use our platforms and tools to build their own AI solutions.”
More specifically, AI drove 7 percentage points of growth for Microsoft’s Azure cloud business last quarter, while the segment saw 31% year-over-year growth. Growth could have been stronger if Microsoft had been able to meet all AI-related demand for cloud services, but the company said demand exceeded supply.
This explains why Microsoft has ramped up its spending on cloud AI infrastructure around the world in countries such as Japan, France, Indonesia, Malaysia and the US. Even better, recent reports indicate that the tech giant could spend $100 billion on building a generative platform. AI supercomputer until 2028. As such, Microsoft is preparing to take full advantage of the growing demand for cloud AI services in the long term.
The cloud AI market was estimated to be worth $43 billion by 2022, according to a third-party estimate. The market is expected to grow 36% annually through 2032 and generate as much as $887 billion in annual revenue. Microsoft generated just over $100 billion in revenue from its Intelligent Cloud division last year, and the increasing growth opportunities in the cloud AI market indicate that there is a lot of room to grow in this area.
Add to that the potential AI-related gains Microsoft could make in the AI-enabled PC and workplace productivity markets, and it won’t be a surprise to see the company’s long-term growth accelerate further.
The robust earnings growth indicates healthy share price growth
Analysts expect Microsoft’s profits to grow 16% annually over the next five years, which would be a slowdown from 20% annual earnings growth over the past five years. However, observers have already seen Microsoft’s net growth accelerate thanks to AI. So it won’t be a surprise if the company’s profits grow faster in the future.
Assuming Microsoft manages to achieve 25% annual earnings growth over the next five years, fiscal 2028 earnings could reach $29.93 per share (based on fiscal 2023 earnings of $9.81 per share ). If we multiply the expected earnings by Microsoft’s five-year forward earnings of 29 points, the stock price after five years comes to $868 – a 110% jump from current levels.
But if the market decides to reward Microsoft with a higher valuation or if the company posts stronger earnings growth, this AI stock could deliver much stronger gains. That’s why investors who missed the Nvidia train should consider jumping into Microsoft stock before they step on the gas.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Did you miss Nvidia’s Run-Up? My Best Artificial Intelligence (AI) Stock to Buy and Hold was originally published by The Motley Fool
