Three artificial intelligence-fueled stocks currently dominate the top of the market. Nvidia (NVDA +2.59%) has rocketed higher over the past 18 months, briefly surpassing both Microsoft (MSFT 0.59%) and Apple (AAPL 0.01%) as the most valuable company in the world.
After Friday's close, Microsoft had the highest market cap at $3.34 trillion, followed by Apple at $3.18 trillion and Nvidia at $3.11 trillion.
All three are within striking distance of $4 trillion, but investors may be wondering which stock has the best chance of getting there first.
The case for Nvidia
Nvidia's financial results have been fueled by the ongoing artificial intelligence (AL) arms race. Big tech companies are buying up as many of Nvidia's chips as they can get their hands on, which has pushed Nvidia to raise prices as supply struggles to keep up with demand.
Nvidia's first-quarter revenue of $26 billion is up 262% from a year ago, and its gross margin expanded 13.8 percentage points to 78.4%. That fueled a massive 629% increase in earnings per share (EPS).
NASDAQ: NVDA
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There aren't many signs of slowing down over the next few months either. Management's Q2 outlook for $28 billion in revenue and 74.8% gross margin suggest another strong earnings result. Meanwhile, big tech companies including Microsoft, Meta Platforms, and Tesla all shared plans to increase their spending on AI data-center expenditures, which include large purchases from Nvidia.
But the long-term outlook is less certain. Nvidia receives a large concentration of its sales from just a handful of customers. One customer accounts for 13% of its direct sales, and one indirect customer accounts for 19% of total revenue. Meanwhile, those big customers, including Microsoft, Meta, and others, are all designing and deploying their own AI chips for their data centers. Once they scale manufacturing, those chips may ultimately provide a more cost-efficient solution for their data centers, reducing their orders from Nvidia.
The short-term potential for Nvidia remains high, but the long-term is murky at best.
The case for Microsoft
Microsoft has consistently found itself to be one of the largest companies in the world since the 1990s. It's kept up with the changing technology landscape throughout its history, and it made an early bet on generative AI leader OpenAI that helped cement its position in artificial intelligence.
Microsoft's early bet on OpenAI and integration with its Azure cloud-computing platform made it the defacto choice among developers looking to use its large language models (LLMs). Azure OpenAI Service has helped fuel Microsoft's cloud-computing revenue 31% higher year over year in the most recent quarter, with 7 points of growth coming directly from AI services.
NASDAQ: MSFT
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Microsoft's also using OpenAI's models to power its Copilot feature across its enterprise-software offerings. The service has seen strong adoption with over 1.8 million paid subscribers, growing 35% quarter over quarter. It surpassed 400 million paid Office 365 seats earlier this year, so there's still a massive runway for it to grow the service.
As the leading enterprise software company and one of the few hyperscale cloud platforms, Microsoft's revenue looks secure. It's investing heavily in building out Azure data centers as demand for AI compute continues to grow, and it should see a strong return on capital since it's also integrating AI features across its entire suite of software. Its position as a leading player in two massive markets should make it a shoo-in to reach a $4 trillion market cap eventually.
The case for Apple
Apple unveiled its AI efforts earlier this month during its annual Worldwide Developers Conference (WWDC). CEO Tim Cook promised to "break new ground" in AI this year. Whether Apple's new AI features constitute groundbreaking innovations is up for debate, but one thing everyone seems to agree on is that Apple did something only Apple can do.
Apple seamlessly integrates its new generative AI features into the iPhone and its other devices. Siri will be far more capable than in the past, acting more like a personal assistant to help remind you of things and schedule appointments. Other generative AI features will make workflow on Apple's devices faster and more efficient. Apple also developed a way to integrate OpenAI's ChatGPT into the service without sharing any user data, and it's working on adding new partners in the same way.
NASDAQ: AAPL
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Here's the big kicker: Apple's latest AI-powered features will only be available on the iPhone 15 Pro, iPhone 15 Pro Max, or the next generation of iPhones set to be released this fall. That could fuel a massive upgrade cycle. Over 93% of existing iPhone users don't have a compatible device right now, according to estimates.
I think it's unlikely to see hundreds of millions of additional upgrades this year, though. Apple's AI won't be available outside of the United States to start. But it could see a small boost in sales and average selling price, and that boost could be sustained for several years as Apple improves its AI features and makes its new devices more enticing.
A bigger upgrade cycle than anticipated this fall could push Apple's stock to a $4 trillion market cap. Combining strong iPhone and service revenue with its massive share-repurchase program should produce strong EPS growth supporting a higher stock price.
Which one will reach $4 trillion first?
If I had to bet on one company reaching a $4 trillion market cap, it would be Microsoft. The company's position in enterprise software is unmatched, giving it a massive platform to sell new AI features. What's more, its partnership with OpenAI makes it a top choice for developers looking to access its large language models and create new AI applications. There's a long runway of growth ahead for Microsoft despite its already massive size.
But either Nvidia or Apple could reach $4 trillion faster if they produce better-than-expected results in the near term. Despite long-term challenges for Nvidia, the near term looks strong. But there's already a lot of upside built into its share price with its forward price-to-earnings (P/E) ratio above 50 times. Apple, meanwhile, is more stable and could benefit from further growth catalysts of strong iPhone sales and additional AI partnerships.
I think Apple has a good chance to reach $4 trillion first, but it's far from guaranteed. Both it and Microsoft look like great investments, even at this price. Nvidia is a lot riskier given its customer concentration and its current valuation.
