Billionaire Stan Druckenmiller is the former manager of Duquesne Capital, a now-closed hedge fund that returned 30% annually without a single down year over a three-decade period. Today, Druckenmiller manages his personal wealth through Duquesne Family Office, but he remains an excellent case study for investors given his impeccable track record.
As of December, Druckenmiller had 21.1% of his $3.3 billion portfolio invested in two artificial intelligence stocks: Nvidia (NVDA +2.54%) accounted for 9.1% and Microsoft (MSFT 0.57%) accounted for 12% of his invested assets. Those stocks have been brilliant investments in the past, but Druckenmiller clearly believes both will create value for shareholders in the future.
Here's what investors should know about Nvidia and Microsoft.
NASDAQ: NVDA
Key Data Points
1. Nvidia
Nvidia impressed Wall Street with its fourth-quarter financial results. Revenue increased 265% to $22.1 billion on exceptional growth in the data center segment, driven by demand for artificial intelligence (AI) chips. On the bottom line, non-GAAP net income soared 491% to $12.8 billion due to an expansion of 10 percentage points in gross margin, driven in part by pricing power. CEO Jensen Huang said conditions are excellent for continued growth into 2025 and beyond.
Nvidia is best known for its graphics processing units (GPUs), chips that have become the gold standard in multimedia and AI computing. The company holds more than 95% market share in workstation graphics chips, and more than 80% market share in machine learning processors. But Nvidia GPUs serve other purposes as well, such as accelerating scientific computing and data analytics. Collectively, the company controls about 98% of the data center GPU market.
Nvidia has extended its ability to monetize AI with networking equipment, central processing units (CPUs), subscription software, and cloud services. The company is now realizing the benefits of that diversification. Networking revenue more than tripled in the fourth quarter, while software and services revenue achieved a $1 billion run rate. Additionally, Huang said in the third quarter, "We are on a very, very fast ramp with our first data center CPU to a multibillion-dollar product line."
Nvidia has a significant advantage in its position as a full-stack AI computing company, meaning it brings together all the hardware, software, and services needed to build, deploy, and manage AI applications across private data center and public clouds. That strategy not only creates more opportunities to monetize existing customers, but also reduces friction for potential customers.
Going forward, Wall Street expects Nvidia to grow earnings per share at 35% annually over the next five years. That makes its current valuation of 66 times earnings look tolerable. That said, the stock could nosedive if earnings grow more slowly than anticipated. Investors comfortable with that risk should consider buying a few shares today.
2. Microsoft
Microsoft reported better-than-expected financial results in the second quarter of fiscal 2024 (ended Dec. 31, 2023), beating estimates on the top and bottom lines. Revenue rose 18% to $62 billion on especially strong growth in the cloud computing segment, supported by momentum in enterprise software. Non-GAAP net income increased 26% to $21.9 million due to disciplined expense management, among other factors.
Growth will likely slow in the coming quarters, but Microsoft remains well positioned to expand its business. The company dominates the enterprise software market due to strength in office productivity, enterprise resource planning, communications, and cybersecurity applications, among other categories. Microsoft accounted for 16.4% of software-as-a-service (SaaS) spending in 2022, more than twice as much market share as its closest competitor, according to the International Data Corp.
Meanwhile, the company has gained market share in cloud computing. Microsoft Azure captured 24% of cloud infrastructure and platform services revenue in the fourth quarter, up about 2 percentage points from the prior year. CEO Satya Nadella said the reason for that increased market share was differentiated AI capabilities.
Microsoft has an exclusive partnership with OpenAI, such that Azure is the sole cloud provider for the company and the only cloud provider that offers access to OpenAI models like GPT-4 and DALL-E 3. Businesses can use those models to build custom generative AI applications fine-tuned with their own data. That value proposition could bring more customers to Azure in the future, possibly extending its market share gains.
Going forward, enterprise SaaS spending is forecast to increase at 13.7% annually through 2030, and cloud computing revenue is projected to grow at 14.1% annually during the same period. That gives Microsoft a good shot at low-teens sales growth through the end of the decade. Meanwhile, disciplined expense management and share repurchases should support slightly faster earnings growth. Indeed, Wall Street expects Microsoft to grow earnings per share at 15% annually over the next five years.
Against that consensus estimate, the company's current valuation of 37 times earnings looks a bit pricey, especially when the three-year average is 32 times earnings. Microsoft is a wonderful company with reasonable growth prospects, but upside may be somewhat limited given its $3 trillion market capitalization. Additionally, I question whether the stock can outperform the market from its current price, so I would personally keep Microsoft on my watch list right now.
