Artificial intelligence (AI) stocks have been in red-hot form on the market in 2023, which is not surprising -- the technology has the ability to transform multiple industries and significantly boost the global economy.
Goldman Sachs estimates that generative AI could boost the global gross domestic product (GDP) by 7%, or $7 trillion, over the next decade. This explains why Nvidia (NVDA +3.75%) stock has erupted over the past year and jumped 192% as of this writing. However, this massive rally in Nvidia stock isn't over yet, and the Wall Street-high price target of $1,100 per share suggests that the stock could go on another quick run higher and rise 170% from current levels.
However, Nvidia isn't the only AI stock that could go on a parabolic run, which refers to a rapid rise in the price of a stock in a short time span, akin to the right side of a parabolic curve on a chart. Microsoft (MSFT +2.28%) is another tech giant capable of going parabolic after its latest results. Let's look at the reasons why both Nvidia and Microsoft could soar much higher.
1. Nvidia
Nvidia's impressive rally has come to a halt of late as the stock has dropped 13% over the past three months. This can be attributed to restrictions imposed by the Commerce Department on sales of its AI chips to China, as well as concerns that AI may be a bubble that could burst.
NASDAQ: NVDA
Key Data Points
However, Nvidia's results and the prospects of the market in which it operates make it clear that the stock could soon regain its mojo. The company's revenue in the second quarter of fiscal 2024 (for the three months ended July 30, 2023) was up 101% from the year-ago period to $13.5 billion. Nvidia's forecast of $16 billion in revenue for the current quarter indicates that its top line could increase 170% year over year.
What's more, analysts anticipate Nvidia will deliver even stronger year-over-year growth of 176% in the fourth quarter of fiscal 2024. Its annual revenue is forecasted to double this fiscal year to $54 billion.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts
More importantly, its healthy growth trajectory is set to continue over the next couple of fiscal years as well, as the chart above indicates. Yet Nvidia could deliver even faster growth than what analysts are anticipating for a couple of simple reasons.
First, the market for AI chips is expected to grow at a faster pace in 2024. Gartner estimates that sales of AI chips could hit $54 billion in 2023, an increase of 21% from last year. The market is set to grow 26% in 2024 to $67 billion before hitting $119 billion in 2027.
Second, Nvidia controls a big chunk of this fast-growing market. The data center business (which houses sales of chips for AI data centers) has produced $14.6 billion in revenue in the first six months of the current fiscal year, accounting for 70% of its top line. The total revenue forecast of $32 billion for the next couple of quarters suggests that it could generate an additional $22 billion in revenue from this segment (assuming 70% of the revenue in the second half comes from the data center segment).
So Nvidia could finish the year with $37 billion in revenue from sales of data center chips, indicating that it controls 70% of the AI chip market based on Gartner's estimate. Nvidia should be able to sustain its solid share of this space thanks to its aggressive product roadmap. All this explains why analysts at Mizuho anticipate a 10x jump in Nvidia's AI revenue over the next five years, which indicates that the stock could go on a parabolic run even after the eye-popping gains it has delivered in the past year.
2. Microsoft
Microsoft kicked off the AI craze last year thanks to its stake in OpenAI, the developer of the popular ChatGPT chatbot. However, shares of the software giant haven't jumped as rapidly as those of Nvidia, with Microsoft stock gaining 40% in the past year. But the company's latest quarterly report could supercharge Microsoft stock, as its AI investments are now bearing fruit.
NASDAQ: MSFT
Key Data Points
Microsoft has moved quickly to integrate AI tools across its product portfolio, from the Azure cloud to the Office productivity software suite to the Bing search engine. This strategy helped the company deliver better-than-expected fiscal 2024 first-quarter results. Its revenue increased 13% year over year to $56.5 billion, easily crushing the $54.5 billion consensus estimate. Earnings increased at a faster pace of 27% to $2.99 per share, well ahead of the $2.65 per share Wall Street estimate.
The company's revenue from the Azure cloud and other services segment, which houses its AI offerings, increased 29% year over year, exceeding the 26% consensus estimate. Microsoft management disclosed that AI drove a three-percentage-point jump in this segment's revenue. Microsoft's AI-driven growth is just getting started, as the company is "rapidly infusing AI across every layer of the tech stack and for every role of business process to drive productivity gains for our customers."
It is set to bring more AI features that should drive stronger revenue growth. For instance, Microsoft will roll out its Copilot AI solution for enterprises next month for a fee of $30 per user per month. This offering could quickly gain traction, as Microsoft says that over 126,000 organizations have already used Copilot during the pilot phase.
This explains why Microsoft's growth is set to accelerate in the current quarter. The company is anticipating $61 billion in revenue in the second quarter of fiscal 2024, which would be a 16% increase over the prior-year period. Additionally, Microsoft's growth is expected to step on the gas over the next couple of years as well.
MSFT Revenue Estimates for Current Fiscal Year data by YCharts
This wouldn't be surprising considering that Microsoft is on track to win from multiple AI niches. That's why there is a good chance that this AI stock could go parabolic, as the proliferation of this technology is now driving tangible gains for the tech giant.
