Nvidia (NASDAQ:NVDA) has been one of the hottest stocks on the market in recent months, which is no surprise considering the company's important role in the artificial intelligence (AI) revolution.
Companies competing to develop and deploy AI applications are turning to Nvidia's graphics processing units (GPUs) to take advantage of the parallel computing power of Nvidia chips so they can train large-scale language models (LLMs) such as ChatGPT. is aimed at. As it turns out, demand for Nvidia's GPUs has been so strong that the company has found it difficult to meet end-market demand, resulting in long wait times.
The good news is that NVIDIA is increasing its production capacity, which is why the strong growth is expected to continue in FY2025 (which has just begun). The company's sales are expected to rise nearly 84% this year to $112 billion, and profits are expected to rise 91% to $24.87 per share. All of this is why investors are rushing into his NVIDIA stock, which is already up more than 82% in 2024.
Nvidia appears well-positioned to justify a hefty 75x trailing earnings given the potential growth it can achieve. The rapid growth in future earnings is evidenced by the significantly lower forward price/earnings ratio of 37x. But investors who missed out on NVIDIA's incredible rise and are wary of paying a high earnings multiple may want to consider taking a closer look.in microsoft (NASDAQ:MSFT).
Like Nvidia, Microsoft is also a major player in the AI market and is currently available for purchase at reasonable valuations. Here's why smart investors should consider it now.
Microsoft stock is attractively valued and AI has a positive impact on its growth
Microsoft stock has only risen 10% so far this year. This explains why the stock is still a buy at a relatively reasonable earnings multiple of around 35x, which is much lower than NVIDIA's price-to-earnings ratio. Microsoft's forward earnings multiple of 31 is also at a discount compared to Nvidia's forward earnings multiple.
Of course, Microsoft isn't growing as fast as Nvidia, but its growth has been accelerating as it has consistently beat Wall Street's revenue expectations in recent quarters.
For example, in the third quarter of fiscal 2024 (ending March 31), Microsoft's revenue increased 17% year over year to $61.9 billion. This was an impressive acceleration over the 7% revenue growth the company posted in the same period last year.
Additionally, Microsoft's profit growth rate improved to 20% year-over-year last quarter, compared to 10% in the year-ago period. As Microsoft management pointed out in its latest earnings call, AI plays a key role in this acceleration. CEO Satya Nadella said the company's Azure cloud platform has “gained market share as customers use our platform and tools to build their own AI solutions.”
More specifically, AI drove 7 percentage points of growth in Microsoft's Azure cloud business last quarter, out of the division's 31% year-over-year growth rate. Growth could have been stronger had Microsoft been able to meet all of the AI-related demand for its cloud services, but the company said demand is outpacing supply.
This explains why Microsoft is increasing its spending on cloud AI infrastructure around the world in countries such as Japan, France, Indonesia, Malaysia, and the United States. Even better, recent reports suggest he could spend $100 billion to help the tech giant build its generation system. AI supercomputer will last until his 2028. That's why Microsoft is poised to take full advantage of the surging demand for cloud AI services over the long term.
According to third-party estimates, the cloud AI market will be worth an estimated $43 billion in 2022. This market is expected to register annual growth of 36% until 2032, with annual revenues amounting to a staggering $887 billion. Microsoft has generated just over $100 billion in revenue from its Intelligent Cloud sector operations in the past year, and increasing growth opportunities in the cloud AI market indicate that there is room for growth in this area. It shows that there are many.
Given the AI-related gains that Microsoft could potentially achieve in the AI-enabled personal computer and workplace productivity markets, it's no surprise that the company's growth will accelerate further in the long term.
Strong earnings growth signals healthy stock price growth
Analysts expect Microsoft's profits to grow at an annual rate of 16% over the next five years, which would be slower than the 20% annual profit growth rate over the past five years. But observers are already seeing Microsoft's revenue growth accelerate thanks to AI. Therefore, it's no surprise that the company's revenue will grow at a faster pace in the future.
Assuming Microsoft can achieve 25% annual earnings growth over the next five years, 2028 earnings could reach $29.93 per share (based on 2023 earnings per share of $9.81) ). Multiplying the expected earnings by Microsoft's five-year future earnings of 29 points yields a five-year stock price of $868, an increase of 110% from current levels.
But if the market decides to give Microsoft a higher valuation, or if the company delivers stronger revenue growth, this AI stock could deliver even bigger gains. That's why investors who missed the Nvidia train should consider jumping on Microsoft shares before it hits the gas.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has a position in Microsoft and He recommends Nvidia. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
Missed the Nvidia readiness stage? My Best Artificial Intelligence (AI) Stocks to Buy and Hold was originally published by The Motley Fool.
