Microsoft (MSFT 0.57%) made headlines late last week when it announced it would spend $80 billion this year building data centers that would train artificial intelligence (AI) models and handle AI and cloud-based applications around the world. More than half of the investment will be in the U.S.
To put the amount Microsoft is spending on AI infrastructure in perspective, that is more than the gross domestic product (GDP) of many countries, including Croatia and Lithuania (to name just two).
Microsoft's Azure cloud has been a big AI winner, with the unit growing its revenue by 33% year over year last quarter and Azure OpenAI use doubling in the last six months. However, the company has said growth could be even greater if it were not for capacity constraints, as demand for its AI services has outstripped capacity.
There were certainly clues that the company was about to go on a big building spree in data centers; it had $108.7 billion in finance leases for data centers whose construction had not yet commenced. These leases were set to go into effect between fiscal 2025 and 2030 with lease terms from one to 20 years.
Nvidia will be the big winner
I think Microsoft will benefit from its increased data center spending given the strong demand its cloud business is seeing. And I believe Nvidia (NVDA +0.42%) will be the ultimate winner from this spending. Not all of that $80 billion will go toward graphics processing units (GPUs) and AI accelerator chips (Nvidia specialties), but a significant portion will.
NASDAQ: NVDA
Key Data Points
For perspective, for its fiscal 2024, ended in June, Microsoft had $44.5 billion in capital expenditures (capex), most of which went toward data centers and cloud computing. The company has said that about half of its capex goes toward assets with long practical lives, while the other half goes toward central processing unit (CPU) and GPU servers.
Microsoft was Nvidia's largest customer in 2024, buying a reported 485,000 of its GPUs, more than twice the amount of its second-largest customer, Meta Platforms. Taken all together, it looks like Nvidia's largest customer is about to spend significantly more on GPUs in 2025 than it did in 2024 -- a huge win for the company.
Even more so, Microsoft's finance leases that have not yet commenced still indicate that it does not plan on stopping its data center spending this year. If $40 billion of its capex is going toward long-life assets like leases, that means less than half of those leases will commence this year.
In addition, the announcement of the huge spending spree could very well spur more AI infrastructure spending from other Nvidia customers. Large tech companies such as Alphabet and Meta Platforms have both stressed the importance of AI and how the biggest risk is underspending, not overspending. Meanwhile, I think it is safe to say there are some pretty big egos in the tech world, and many execs want to win the AI race. As such, I wouldn't be surprised to see other large hyperscalers (companies with huge data center operations) also ramp up spending.
Nvidia remains the king of GPUs, holding about a 90% market share in the space. Its CUDA software platform, which lets developers program its chips for different tasks, has proved to be a big differentiator and created a wide moat for the company. With competitor Advanced Micro Devices still trailing behind with its software, Nvidia looks poised to continue to be the biggest AI infrastructure winner.
The company's toughest competition may come from custom AI chips that companies like Broadcom and Marvell Technology help clients develop. These chips are designed to perform very specific tasks and thus can perform them better than GPUs, which have more flexibility.
But these chips are also customer-specific. And for mass deployment at scale, Nvidia and its GPUs are still the quickest and easiest ways to build out large AI infrastructure projects, and as such will continue to hold a large market share.
Image source: Getty Images.
Is Nvidia's stock a buy?
Nvidia still has a large opportunity with companies continuing to pour money into AI infrastructure. The fact that its largest customer is greatly ramping up its investment in this area is a great sign that the chipmaker will continue to see outsize growth in 2025.
Nvidia's stock continues to trade at an attractive valuation, with a forward price-to-earnings ratio (P/E) of only about 31.4 based on 2025 analyst estimates, and a price/earnings-to-growth ratio (PEG) of 0.98. A PEG below 1 is generally view as undervalued, and growth stocks will often command PEGs well above 1.
NVDA PE ratio (forward 1y), data by YCharts.
With the company looking to be the biggest beneficiary of Microsoft's $80 billion data center build-out, and its stock still attractively priced, Nvidia remains a solid option for investors.
