Nvidia (NVDA 0.81%) and Microsoft (MSFT +0.25%) are two of the most valuable companies in the world, with market capitalizations of $4.4 trillion and $3.8 trillion, respectively. But certain Wall Street analysts think the stocks are headed much higher in the next year.
- Frank Lee at HSBC recently raised his target on Nvidia to $320 per share. That implies 75% upside from its current share price of $182. Timothy Arcuri at UBS has an identical target price.
- Michael Turrin at Wells Fargo recently raised his target on Microsoft to $675 per share. That implies 30% upside from its current share price of $516. Terry Tillman at Truist has an identical target price.
Here's what investors should know about these artificial intelligence stocks.
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Nvidia
Nvidia is an accelerated computing company best known for its graphics processing units (GPUs), chips also known as data center accelerators because they speed up artificial intelligence (AI) and other demanding workloads. Nvidia holds more than 90% market share in data center GPUs, a market forecast to grow at 36% annually through 2033, and the company is well positioned to maintain its leadership.
Nvidia has differentiated itself with a full-stack approach to accelerated computing, meaning it goes beyond GPUs to build entire data center systems complete with CPUs, interconnects, networking, and software. That vertical integration lets Nvidia build rack-scale solutions like the GB200 NVL72, which pairs 36 Grace CPUs with 72 Blackwell GPUs connected with NVLink Switch technology to create a single accelerated system.
Nvidia also provides InfiniBand and Ethernet networking platforms, which can connect multiple GB200 NVL72 systems. In fact, the company leads the market in generative AI networking gear, according to Morningstar. But the competitive moat most often overlooked is CUDA, a software platform that brings together code libraries, pretrained models, and frameworks to help developers write GPU-accelerated applications.
Nvidia naysayers often highlight growing adoption of custom accelerators from rivals like Broadcom. But those chips lack supporting software, which means it must be built from scratch. Few companies possess the technical knowhow and resources to do that, which will ultimately limit adoption. Meanwhile, AMD GPUs have supporting software, but it pales in comparison to CUDA.
In short, Nvidia is well positioned to retain its leadership in AI infrastructure due to its full-stack strategy. Its ability to design entire data centers lets it build systems with a lower total cost of ownership, meaning its products are actually cheaper after operating expenses are factored into the equation. Broadcom and AMD may gain a little market share, but neither company is likely to be a substantial threat to Nvidia any time soon.
Wall Street expects Nvidia's earnings to increase at 36% annually over the next three years. That makes the current valuation of 52 times earnings look surprisingly reasonable. Shares have skyrocketed 1,250% since November 2023, when the launch of ChatGPT started the AI boom, but Nvidia stock is still worth buying today.
NASDAQ: NVDA
Key Data Points
2. Microsoft
Microsoft is the largest enterprise software company in the world. Its best known product is the office productivity suite, which includes applications like Word, Excel, and PowerPoint. But Microsoft is truly formidable because it has a strong presence across several other end markets, including business intelligence, cybersecurity, and enterprise resource planning.
Microsoft is well positioned to monetize artificial intelligence due to the popularity of its software, and the company is executing on that opportunity. Its copilot applications, generative AI tools that automate tasks across other software products, topped 100 million monthly active users in the most recent quarter, according to CEO Satya Nadella.
Also, Microsoft Azure is the second largest public cloud after Amazon Web Services, which again leaves the company well positioned to monetize artificial intelligence. Cloud services revenue increased faster than 30% in each of the last eight quarters and growth actually accelerated to 39% in the most recent quarter, the strongest number in the last two years.
Investors have good reason to believe Microsoft can maintain that momentum. Management says Azure has been capacity constrained for the duration of the AI boom, meaning demand for AI services has outpaced the available compute supply. But Microsoft is scaling its data center capacity faster than any other cloud services company, according to Satya Nadella.
Wall Street expects Microsoft's earnings to increase at 12% annually over the next three years, which roughly matches forecasted growth in the enterprise software market during that period. But that makes the current valuation of 38 times earnings look too expensive. Those numbers give a price-to-earnings-to-growth (PEG) ratio of 3.1. But Nvidia has a PEG ratio of 1.4, meaning the stock is literally twice as cheap by that particular metric.
