Commitments for data center spending keep rising. That is good news for any company connected to the artificial intelligence (AI) bonanza.
Microsoft CEO Satya Nadella just reaffirmed his plan to spend $80 billion on AI data centers in 2025, mostly in connection with its OpenAI partnership and cloud computing division. For reference, the company had around $50 billion in total capital expenditures (capex) in 2024.
This is a huge step up in spending. And it isn't just Microsoft; other companies are also planning a capex blowout in 2025.
Who will benefit from this spending? You guessed it: Nvidia (NVDA +0.29%). The AI chip champion is lining up to increase supply to fulfill all these customer needs, and the company should see revenue jump yet again in 2025. But it won't be the only business cheering on these spending commitments from big tech.
Here's what Microsoft's $80 billion promise means for Nvidia and other AI stocks in 2025 and beyond.
Data center spending jumps in 2025
Investing in AI comes with uncertainty. If anyone tells you what this fast-growing sector will look like in 2030, they are overconfident. One thing we do know for certain, though: Spending on data centers related to AI will grow aggressively in 2025.
Microsoft is spending $80 billion. Meta Platforms plans to spend $60 billion to $65 billion, which would be close to double its 2024 figure.
We don't have the plans from Amazon or Alphabet yet, but I would expect similar jumps as they hope to stay competitive in the AI race.
Let's not forget OpenAI or Project Stargate, either. The new initiative is set to invest $500 billion in data centers in the United States over a multiyear period, an eye-watering figure no matter how you slice it. SoftBank is planning to invest upward of $25 billion into OpenAI to keep the party going.
Add it altogether, and we could see hundreds of billions in fresh data center investments from just the largest technology companies in 2025. This is fantastic news for their suppliers such as Nvidia.
NASDAQ: NVDA
Key Data Points
All roads lead to more computer chips and Nvidia
The majority of spending on these new AI data centers will be going to computer chips, which are used to run the intensive computing in AI software tools that are seeing rapid customer adoption. Microsoft said its AI revenue is already at an annualized rate of $13 billion in just a few short years, and growing quickly.
Nvidia is the dominant provider of computer chips for these data centers at the moment. Therefore, when data center spending increases, its revenue should increase.
This is why its sales have grown by close to 1,000% in the last five years, hitting $113 billion in the last 12 months. With this jump in capex planning and the release of Nvidia's state-of-the-art Blackwell chip, the company's revenue should soar yet again in 2025.
Investors are optimistic about Nvidia. It is now one of the largest companies in the world with a market cap of $3 trillion. It trades at a trailing price-to-earnings ratio (P/E) of 48, which is well above the S&P 500 index average of 30. This doesn't mean the stock will do poorly, but investors have placed high expectations on its future growth.
NVDA PE ratio; data by YCharts.
One AI stock could be a better buy than Nvidia
Nvidia is clearly a good business, and its customers are planning to spend a boatload on its products in 2025. However, I think there is a more durable AI semiconductor stock that is cheaper to buy at the moment.
It's Taiwan Semiconductor Manufacturing (TSM 0.27%), or TSMC for short. The leader in computer chip manufacturing is the company that actually builds Nvidia's products (Nvidia designs them). It also works with other companies such as Apple, another top customer.
NYSE: TSM
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There are two reasons to like TSMC over Nvidia as a long-term bet on AI stocks. First, it will benefit even if the competition for Nvidia increases. Its customers such as Alphabet and Amazon are investing heavily to vertically integrate and build their own AI computer chips.
This could hurt Nvidia's business over the long run but will have no effect on TSMC since it is the only one that can build these chips, regardless of whether it's for Nvidia or Amazon. This makes TSMC a safer bet over the long term.
Second, TSMC trades at a cheaper valuation than Nvidia with a P/E below 30. Again, this means that TSMC has lower expectations from investors for future growth.
Add it altogether and I think TSMC is a great buy-and-hold for investors looking to play the AI theme. Spending on data centers is set to boom in 2025, and a lot of that money will eventually make its way back to TSMC.
