Why Microsoft and Nvidia are big winners this year

Nvidia will dominate the AI chip market in the near future.
Microsoft’s Copilot and Azure platforms are expanding.
Both stocks still look like reasonable value compared to their growth potential.
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The artificial intelligence (AI) market has expanded rapidly in recent years as sophisticated AI chatbots have captured hundreds of millions of users. This long-term shift is driving more companies to upgrade their AI infrastructure and integrate more AI applications into their businesses.

According to Grand View Research, the AI market is expected to continue expanding at a CAGR of 30.6% from 2026 to 2033. The two tech giants are well-positioned to profit from that boom. Nvidia (NASDAQ:NVDA) and microsoft (NASDAQ: MSFT). Let’s take a look at why both stocks remain the “best of the breed” in this year’s growing AI applications market.

Digital brain visualization. — Image source: Getty Images.

Nvidia produces over 90% of the world’s discrete GPUs. Unlike CPUs, which are optimized for sequential tasks, GPUs can handle a wide range of parallel tasks, making them ideal for complex graphics, machine learning, and AI applications.

Nvidia once derived most of its revenue from gaming PCs, but high-end data center GPUs now account for most of its sales. Most of the world’s leading AI software companies, including Microsoft, Metaand alphabetGoogle — spending billions of dollars on GPUs in these data centers.

Nvidia locks these customers into CUDA (Compute Unified Device Architecture), a proprietary programming platform for its chips, and other optimized services. The tenacity of its ecosystem has widened its moat for other chipmakers, constantly strengthening its first-mover advantage with smaller, denser, and more power-efficient chip architectures, including Turing (2019), Ampere (2020), Hopper (2022), and Blackwell (2024).

So Nvidia should continue to sell the best picks and shovels for the AI gold rush for the foreseeable future. Analysts expect sales and earnings per share (EPS) to grow at a CAGR of 47% and 45%, respectively, from FY2025 (ended in January last year) to FY2028. That’s an impressive growth rate for a stock trading at 27x next year’s P/E, and as long as demand for new AI chips exceeds supply, the stock will continue to rise.

Over the past decade, Microsoft has undergone a “mobile-first, cloud-first” transformation under Satya Nadella, who took the helm as its third CEO in 2014. By sticking to that strategy, the tech giant transformed its Office desktop software into cloud-based services and mobile apps, expanded Azure to become the world’s second-largest cloud infrastructure platform, and turned Windows OS into a central hub for cloud, mobile, and AI services. We also expanded our Xbox gaming division with major acquisitions and launched new Surface devices.

Microsoft also began investing in OpenAI, the developer of ChatGPT, in 2019. Microsoft is now the startup’s largest investor and is integrating OpenAI’s technology into its Copilot generative AI platform, Azure cloud services, and other Microsoft 365 productivity services. These AI upgrades have locked in enterprise customers and widened the moat against competitors.

Over the next year, Microsoft will continue to expand Copilot by rolling out more specialized agents for finance, legal, sales, healthcare, and engineering markets. We also expect to increase the number of employees per licensed customer to maintain pricing power. As Copilot gains further momentum, economies of scale should come into play and help reduce infrastructure costs. Development of custom AI chips, including Maia and Cobalt, could further improve Azure’s performance per dollar, strengthen profit margins, and reduce dependence on Nvidia over time. Meanwhile, Azure will continue to benefit from the AI boom as more companies upgrade their cloud infrastructure to support modern AI applications.

Analysts expect Microsoft’s revenue and EPS to grow at a CAGR of 16% and 18%, respectively, from fiscal year 2025 (ending last June) to fiscal year 2028. The company’s stock remains reasonably valued at 26x next year’s P/E and continues to play a balanced role in expanding the cloud, mobile, gaming, enterprise software, and AI application markets.

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Leo Sun has a position in Meta Platform. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

“AI Application Boom: Why Microsoft and Nvidia are winning big this year” was originally published by The Motley Fool.

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