Artificial intelligence stocks have stumbled as tariffs imposed by the Trump administration have caused recession fears to resurface. That is especially true where the "Magnificent Seven" are concerned. Every stock in the group has declined year to date, and most have declined more than 10%.
However, certain Wall Street analysts think shares of Nvidia (NVDA +2.33%) and Microsoft (MSFT 0.63%) are oversold, as detailed below:
- Vivek Arya at Bank of America has set Nvidia with a 12-month target price of $200 per share. That implies 69% upside from its current share price of $118. It also implies a market value of $4.8 trillion.
- Brent Thill at Jefferies has set Microsoft with a 12-month target price of $550 per share. That implies 42% upside from its current share price of $386. It also implies a market value of $4.1 trillion.
Here's what investors should know about these AI stocks.
NASDAQ: NVDA
Key Data Points
Nvidia: 69% implied upside
Nvidia graphics processing units (GPUs) power virtually all of the most advanced artificial intelligence (AI) systems. Forrester Research last year wrote, "Nvidia sets the pace for AI infrastructure worldwide. Without Nvidia's GPUs, modern AI wouldn't be possible." But the company is truly formidable because it also builds adjacent hardware like CPUs and networking, meaning it essentially builds entire AI data centers.
Nvidia stock is currently 21% below its high because investors are worried about two potential headwinds. First, DeepSeek reportedly trained a sophisticated reasoning model with fewer GPUs than U.S. companies like OpenAI. Nvidia stock sold off on the news, but CEO Jensen Huang says the market got it wrong. He believes cost efficiencies will boost demand for AI hardware by making the technology affordable for more companies.
Second, the U.S. government in recent years has imposed strict export controls that prevent Nvidia from selling its most powerful chips to Chinese and Russian customers, and limit its ability to sell chips in other markets. Consequently, the percentage of total revenue derived from China fell from 21% in fiscal 2023 to 13% in fiscal 2025. That number could get even smaller if new restrictions are imposed.
That risk notwithstanding, Nvidia also has tailwinds on the horizon. The company recently began selling Blackwell GPUs, its latest data center accelerator. CEO Jensen Huang says it will be the "most successful product" in company history. Also, Nvidia has developed full-stack computing products for autonomous cars and robots, meaning solutions that span data center hardware, software development tools, and embedded (on-device) systems.
That leaves Nvidia with plenty of room to grow its business as the AI revolution continues to evolve. Grand View Research estimates spending across AI hardware, software, and services will increase at 36% annually through 2030. And Jensen Huang on the fourth-quarter earnings call told analysts, "No technology has ever had the opportunity to address a larger part of the world's GDP than AI."
Wall Street expects Nvidia's earnings to grow at 39% annually through fiscal 2027, which ends in January 2027. That consensus estimate makes the current valuation of 39 times earnings look cheap. I'm not sure shareholders will realize 69% returns in the next year given the widespread uncertainty surrounding tariffs, but long-term investors should feel comfortable buying a position in Nvidia today.
NASDAQ: MSFT
Key Data Points
Microsoft: 42% implied upside
Microsoft is the largest enterprise software company and second largest public cloud. That puts it at the center of two growing markets. Enterprise software sales are forecast to grow at 12% annually through 2030, and cloud computing sales are projected to increase at 21% annually over the same period. That gives Microsoft a reasonable shot at achieving double-digit earnings growth through the end of the decade.
Microsoft is integrating artificial intelligence into products in both segments in an effort to gain market share, but investors have so far been unimpressed. The stock has fallen 17% from the record high reached in July. And DeepSeek has raised questions about whether it has been overspending on AI, both in terms of data center infrastructure and investments in OpenAI.
Admittedly, large language models will likely be commoditized in the future, meaning they will essentially be interchangeable. It makes little sense in that scenario to invest billions in closed-source (proprietary) models as OpenAI has done. Closed-source models are only worthwhile if they provide a competitive advantage. Otherwise, open-source models like those from DeepSeek and Meta Platforms are more sensible.
However, the cost efficiencies achieved by DeepSeek are actually good news for Microsoft. Demand for AI cloud services should increase as model-training costs drop, and a recent CIO survey from Morgan Stanley identified Microsoft Azure as the public cloud most likely to gain market share in the next three years.
Importantly, while the market was disappointed with Microsoft's financial results in the second quarter of fiscal 2025, which ended in December, CEO Satya Nadella shared some encouraging news. "Our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year over year."
Wall Street expects Microsoft's earnings to grow at 13% annually through fiscal 2026, which ends in July 2026. That puts the current valuation of 31 times earnings somewhere between fair and expensive. But Microsoft beat the consensus estimate by an average of 5% in the last six quarters. If that trend continues, and I believe it will, the current valuation would look reasonable in hindsight.
Personally, I am skeptical that Microsoft stock can return 42% in the next year, but I do think patient investors should consider buying a position today.
