Nvidia (NVDA) vs. Microsoft (MSFT): A Battle of AI Giants

Nvidia (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT) are arguably two giant companies that have benefited the most from the rise of artificial intelligence (AI). This makes it difficult to adopt any position other than a bullish one on either of these firms. However, considering Nvidia’s rapid growth compared to Microsoft’s steadier trajectory, I now lean towards Microsoft as the better buy between the two.

Microsoft democratizes AI accessibility and integration through its software and cloud offerings, whereas Nvidia provides the specialized hardware needed for AI processing. Together, their distinct capabilities foster a robust ecosystem for AI innovation across various industries, making them complementary forces.

In this article, I’ll deep-dive into both companies, comparing revenue growth, profit margins, and valuation differences.

Nvidia’s Exponential Growth and the Road Ahead

Nvidia has been on fire lately, stealing the spotlight in the stock market and even outranking Big Tech companies like Microsoft and Apple (NASDAQ:AAPL) to become the world’s most valuable company by market cap in mid-2024. Over the last five years, NVDA’s jaw-dropping 2,998% surge has been linked to investors betting big on AI’s potential to shake up the economy.

Nvidia’s achievements speak volumes. Thanks to AI hitting its stride, Nvidia’s growth has been exponential, especially in the past year and a half. Its revenue has surged from $6.91 billion in 2017 to $60.92 billion by January 2024. It has also ramped up its operating profit margin in a big way. The company’s net margins are now 48.8%, an increase from the 24% margins in 2017. That means Nvidia is doubling its margins by tightening costs as business booms.

In addition, we have good visibility into Nvidia’s sales prospects, and they look very strong. Nvidia’s sales come with very high-profit margins- over 78% in gross profit margin- while projections indicate a 97% revenue growth by the fiscal period ending in January 2025, followed by an additional 32% growth for January 2026. Therefore, we can see that Nvidia’s growth is remarkable.

The big catch is that Nvidia needs to keep this momentum. With a forward EV/EBITDA of 38x, any slowdown in growth expectations could spell trouble. That said, this valuation may make sense if Nvidia is still in its early or mid-growth phase. But there’s always that nagging worry that the nearly 3,000% jump in the last five years might burst at the face of the first major hurdle.

However, it seems that Wall Street doesn’t share this concern. When we look at analyst consensus, even with the valuation premium, Nvidia is a Strong Buy where 38 out of 41 analysts have a bullish recommendation, while only three have a Hold recommendation. The average price target is $135.09, suggesting an upside potential of 9.35%.

The most optimistic is Rosenblatt Securities Hans Mosesmann, a five-star analyst according to Tipranks ratings, who has a $200 price target on Nvidia and believes that the path to strong valuation lies in Nvidia’s participation in software, to significantly increase the overall sales over the next decade, positively impacting valuation due to its sustainability.

Microsoft: Riding a Linear Growth Wave

Microsoft is undeniably riding a wave of significant growth opportunities amid the current GenAI boom. While not as explosive as Nvidia, the company has surged over 245% in the past five years.

The company has effectively revitalized its growth momentum through the successful execution of its GenAI monetization strategies. These include gaining substantial traction with Microsoft 365 Copilot, its exclusive cloud partnership with OpenAI, and impressive performance from Azure.

In 2017, Microsoft’s revenue was about $96.5 billion for the full year. Fast-forward to 2023, and it’s tripled to $211.9 billion for the full year. That’s a massive leap and shows how much they’ve grown compared to Nvidia, whose total revenue for the last year is less than half of Microsoft’s growth over the decade.

When it comes to profitability, Microsoft’s profit margin has jumped from around 26.3% to a solid 34.1% in the past year. Their growth has been steady, unlike Nvidia’s rocket-like trajectory.

The crucial point is that steady growth also leads to Microsoft’s stock trading at a premium. Usually, any stock trading above 10x EV/Sales may be considered pricey. Right now, Microsoft is sitting at forward 13x EV/Sales and 36x forward non-GAAP P/E ratio, the highest in five years compared to an average of 31x. I believe that MSFT’s premium price reflects the confidence in their long-term growth, especially with their AI push.

Microsoft has been ramping up CapEx by more than 50% year-over-year in the last three-quarters of 2024 to beef up its cloud and AI game for what’s coming next.

The Wall Street consensus, however, couldn’t be more bullish—in fact, it could. Of the 35 analysts who cover the stock, only one has a Hold recommendation, while the rest have reiterated a Buy rating in the stock. The average price target among analysts is $500.71, indicating a potential upside of 10.57%.

The most bullish is Truist Financial’s Joel Fishbein, a five-star analyst according to Tipranks ratings, who has a price target of $600 on Microsoft stock. The analyst said Microsoft’s guidance could be conservative with multiple tailwinds and the ability to beat and raise with AI projects expanding, mentioning mainly growth in Azure.

Conclusion

Nvidia and Microsoft are probably the most dominant players in AI right now, with Nvidia leading in hardware and Microsoft in software. Together, they form a powerful synergy that dominates the AI landscape, accelerates industry growth, and fosters continuous innovation.

Both companies are still seeing solid demand, with very few concerns. However, Nvidia’s growth has been exponential, while Microsoft’s has been steady and linear. This means any bumps in the road could hit Nvidia harder than Microsoft. Though I’m still bullish on both, I lean more toward Microsoft as a better buy.

Disclosure