NVIDIA All-in Retail Investors Shocked... Will Returns Be Outperformed by 'Microsoft' in 3 Years?

▲ Microsoft (MSFT), NVIDIA (NVDA), US Tech Stocks/AI Generated Image

The enthusiasm for artificial intelligence (AI) investment has simultaneously pushed up Microsoft (Microsoft, MSFT) and NVIDIA (NVIDIA, NVDA). However, an analysis suggests that over the next three years, the competition might hinge more on resilience than growth speed. While NVIDIA represents the explosive power of the AI chip market, Microsoft is evaluated as a defensive growth stock that holds cloud, enterprise software, and AI services together.

According to Nasdaq on July 2 (local time), Justin Pope of The Motley Fool compared Microsoft and NVIDIA, stating a slight preference for Microsoft as a stock to hold for the next three years. Pope acknowledged that NVIDIA is a prime beneficiary, dominating the market for graphics processing units (GPUs) for AI data centers. However, he pointed out that since market expectations are already largely reflected in the stock price, future considerations must include not only earnings growth but also stock price burden and business stability.

NVIDIA's growth drivers remain strong. Its next-generation AI chip platform, Vera Rubin, has entered full production, with shipments potentially starting by the end of this year. Jensen Huang, NVIDIA's CEO, predicted that orders for Vera Rubin and Grace Blackwell chips could reach $1 trillion by 2027. Wall Street estimates NVIDIA's revenue could grow from $253 billion in the trailing 12 months to $392 billion this fiscal year and $554 billion next fiscal year. The price-to-sales ratio (PSR) has also fallen below 19x, indicating less burden than in the past.

Microsoft is not a company solely dependent on a single hardware cycle like NVIDIA. Pope analyzed that while Microsoft rose to a key position in the AI market with its investment in OpenAI, a strategy adjustment became necessary as some enterprise customers began using other AI models like Anthropic's Claude. Consequently, Microsoft is moving towards embracing various AI models based on its Azure, enterprise software, and Copilot ecosystems. Notably, its $627 billion in remaining commercial performance obligations is presented as a strong foundation supporting future revenue visibility.

The difference between the two companies is clearer in their downside protection than in their upside potential. NVIDIA stands to benefit most if AI data center investment continues to surge, but revenue expectations and stock prices could simultaneously falter the moment big tech's AI infrastructure spending slows down. In contrast, Microsoft has diverse revenue streams, holding cloud, Office, Windows, and enterprise AI services together. Pope explained that Microsoft has been valued at an average of nearly 33 times its trailing 12-month earnings over the past decade, but is currently trading at around 22 times. Wall Street expects Microsoft's earnings to grow at an average annual rate of 16-17% over the next 3-5 years.

The conclusion is not to deny NVIDIA's growth potential, but rather that Microsoft is a more comfortable choice if one were to pick a stock to hold for three years at current prices. NVIDIA is a high-growth play, boasting a $1 trillion forecast for AI chip orders, but the impact is also significant when investor expectations falter. While Microsoft may not overpower NVIDIA in terms of growth speed, it is evaluated as a stock equipped with a $627 billion contract base, a 22x earnings multiple, and a projected annual earnings growth of 16-17%.

[Article Summary]

-The Motley Fool expressed a slight preference for Microsoft over NVIDIA in its comparison of AI stocks for the next three years.

-NVIDIA's Vera Rubin and Grace Blackwell orders could reach $1 trillion by 2027, with revenue projected to grow to $554 billion next fiscal year.

-Microsoft was evaluated as a more stable AI investment, backed by $627 billion in remaining commercial performance obligations, a 22x earnings multiple, and a projected annual earnings growth of 16-17%.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*