Nvidia (NVDA 2.94%) shares soared 270% over the past year as enthusiasm for all things related to artificial intelligence (AI) whipped investors into a frenzy. But some on Wall Street think the chipmaker is nearing the end of its record run, at least for the time being. Indeed, some analysts see Microsoft (MSFT 0.43%) and Docebo (DCBO +2.15%) as better AI stocks to buy right now.
Here are the median 12-month price targets for each company and the implied upside or downside compared to the current share price:
- Nvidia: $860.50 per share (2% downside)
- Microsoft: $465 per share (15% upside)
- Docebo: $65 per share (25% upside)
These price targets do not mean Nvidia is a poor investment. Those numbers are simply educated guesses about what could happen in the next year. Even if Nvidia underperforms during that period, the stock could still outperform over the next five years.
However, investors should not fixate on a single AI stock. The most prudent strategy is to spread money across a group of AI stocks. With that in mind, Microsoft and Docebo warrant further consideration.
NASDAQ: MSFT
Key Data Points
1. Microsoft
Microsoft has two major growth engines in enterprise software and cloud computing, and the company controls a large chunk of both markets. Specifically, Microsoft accounts for about 16% of software-as-a-service (SaaS) revenue, twice as much as its closest competitor, due to strength in office productivity (Microsoft 365) and enterprise resource planning (Dynamics 365) software.
Additionally, Microsoft Azure accounts for roughly 24% of cloud infrastructure and platform services revenue, which puts it seven points behind market leader Amazon Web Services, but 13 points ahead of Alphabet's Google Cloud. That success is a product of expertise in hybrid computing solutions, developer capabilities, and artificial intelligence (AI) services.
Microsoft reported better-than-expected financial results in the second quarter of fiscal 2024 (ended Dec. 31). Revenue increased 18% year over year to $62 billion on strong momentum in cloud computing and modest growth in enterprise software. Meanwhile, non-GAAP (generally accepted accounting principles) net income soared 26% year over year to $2.93 per diluted share due to disciplined expense management.
Microsoft is leaning into generative AI across its software and cloud businesses. The company launched a natural language assistant for Microsoft 365 that can draft text in Word and create content in PowerPoint. It also launched a generative AI assistant for Dynamics 365 that can automate sales, customer service, and finance workflows.
Similarly, Microsoft has formed an exclusive partnership with OpenAI. Per that agreement, Azure is the exclusive cloud provider to OpenAI, meaning its infrastructure powers applications like ChatGPT. Additionally, Azure customers can integrate their own data into large language models like GPT-4 to build custom generative AI applications. JPMorgan analysts have said, "Microsoft's investment into OpenAI, which started years ago, could potentially prove to be some of the best money ever spent."
Going forward, the SaaS and cloud computing markets are forecast to expand at 14% annually through 2030. That gives Microsoft a good shot at double-digit sales growth through the end of the decade, especially if its AI ambitions bear fruit. That makes its current valuation of 13.3 times sales seem tolerable, despite being a material premium to the three-year average of 11.5 times sales.
Investors should consider buying a small position today, with the understanding that Microsoft is already a $3 trillion company, so other AI stocks likely offer more upside in the long run.
NASDAQ: DCBO
Key Data Points
2. Docebo
Docebo sells learning management software. Its platform helps businesses create, curate, deliver, and measure the impact of learning material across internal audiences like employees, as well as external audiences like customers. Two applications are particularly innovative. Docebo Shape uses generative AI to turn source material like documents and presentations into training content, and Docebo Flow embeds training content into other software.
Product innovation has helped Docebo achieve a strong market presence. To quote Morgan Stanley analyst Josh Baer, "Docebo is not only disrupting the internal learning management system (LMS) market, taking share from legacy vendors, but it is also leading the market in a greenfield external learning opportunity." He also sees Docebo as one of the software companies best positioned to benefit from generative AI.
Docebo reported fourth-quarter financial results that beat expectations on the top and bottom lines. Customers increased by 11% year over year, average contract value increased by 12%, and existing customers spent 4% more. In turn, revenue increased 27% year over year to $46 million, and net income soared 101% to $3.2 million. Management also said partnerships with systems integrators are helping Docebo land larger enterprise customers, including a top-five technology company and a top-four bank.
Generative AI remains a strategic priority for Docebo. The company plans to add new features to Docebo Shape this year, including a copilot that offers higher levels of automation and virtual role-play that provides real-time feedback. CEO Claudio Erba says, "Shape will fundamentally change how training material is created and consumed."
The learning management systems market is forecast to grow 20% annually through 2030, but Wall Street expects Docebo to gain share. The consensus estimate calls for 25% annual sales growth over the next five years, which makes the current valuation of 9.8 sales look reasonable. Investors should feel comfortable buying a small position in this stock today.
