There is something unusual about the way investors are pricing Nvidia Corporation (NASDAQ:NVDA) and Microsoft Corporation (NASDAQ:MSFT). Nvidia nearly doubled its revenue in a single year, while Microsoft grew at a far more familiar pace. And yet, Yahoo Finance’s most recently available valuation data put them at almost identical forward earnings multiples: 24.88 times for Nvidia and 25.13 times for Microsoft.
The comparison poses a serious question for investors: is the market putting too little weight on Nvidia’s growth, or too much faith in its durability? Before we get to the answer, we meticulously compiled a list of the best big name stocks to buy according to financial media, and there are eight stocks other than NVDA and MSFT that rank on that list. Access the complete list for free here.
Bull Case
Nvidia’s July-quarter results are difficult to dismiss as excitement without substance. Revenue reached $96.2 billion, up 106% from a year ago, and operating income climbed 124% to $63.7 billion, with gross margin at 75%. Those are reported profits from products already sold, not forecasts of what artificial intelligence might eventually earn. Data Center revenue alone reached $89 billion, making the infrastructure business overwhelmingly responsible for Nvidia’s expansion. Nvidia was also among Claude’s top AI picks this year. Read more about it here.
Even the company’s next-quarter outlook suggests that management expects the surge to continue. Nvidia projected revenue of roughly $108 billion for the October quarter, with a 2% range on either side. It is guidance, not a completed result, but it gives substance to the argument that this spending cycle has not yet exhausted itself. Which other big name stocks does the financial media favor? Access our complete list here for free.
Microsoft Corporation (NASDAQ:MSFT) has a more complicated, and arguably more resilient, earnings story. In its June quarter, Azure and other cloud services revenue grew 43%, but Microsoft’s $40.6 billion of operating income came from a company with far more than cloud infrastructure to sell. Microsoft Cloud revenue also reached $59.3 billion, up 27% year-over-year. The company is thus not relying exclusively on selling more computing capacity to produce profits. Microsoft also reported $678 billion in commercial remaining performance obligations, up 84%. Read more about what Michael Burry has to say about MSFT stock here.
Bear Case
We also shortlisted the best healthcare stocks to buy according to hedge funds. Check out the complete list here to make an informed decision.
For Nvidia Corporation (NASDAQ:NVDA) , the discomfort lies in how much success has become concentrated in one market. Data Center represented about 92.5% of quarterly revenue. Its extraordinary operating margins are real, but the earnings outlook is consequently closely linked to customers continuing to build costly AI infrastructure. Nvidia’s forecast also assumes no Data Center compute revenue from China, illustrating a constraint management explicitly acknowledges.
Nvidia’s reported net profit merits a second look as well. Its $2.46 GAAP diluted earnings per share exceeded its $2.22 non-GAAP figure. The income statement included $7.8 billion of net other income, substantially reflecting equity-security gains. That is why its 124% rise in operating income is a better measure of the chip business’s progress than headline net income alone.
Microsoft’s vulnerability looks different. Its cloud business is growing, but supplying that growth is becoming exceptionally expensive. Cash purchases of property and equipment reached $35.8 billion in the June quarter, compared with $17.1 billion a year earlier. The spending supports Microsoft’s broader infrastructure requirements, not Azure alone, but its scale illustrates how much investment now accompanies cloud expansion.
Conclusion
At nearly the same forward P/E, Nvidia Corporation (NASDAQ:NVDA) offers far faster current operating growth, but with a greater dependence on sustained AI infrastructure orders. Microsoft Corporation (NASDAQ:MSFT) offers several established profit streams, though the cost of expanding its cloud capacity is becoming harder to overlook.
The comparison turns on whether Nvidia can maintain its pricing and profitability, and whether Microsoft’s enormous spending produces enough additional cash to justify it.
While we acknowledge the risk and potential of NVDA and MSFT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NVDA and MSFT and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: Can Eli Lilly Catch Novo Nordisk in the Oral GLP-1 Race? AND Abbott vs. Intuitive Surgical: Is Consistent Growth Better Than Premium Growth?
This article is originally published at Insider Monkey.
Hedge Fund Resource Center