Nvidia vs. Microsoft: The Race to the $4 Trillion Milestone
Nvidia and Microsoft are in a tight race to become the world’s first $4 trillion company. But which tech giant will reach the finish line first?
Nvidia and Microsoft are both within striking distance of a $4 trillion market capitalization, marking a significant milestone in the tech industry. Nvidia, fueled by its dominance in the artificial intelligence (AI) sector, appears to have a slight edge over Microsoft in this high-stakes race.
The AI Advantage: Nvidia’s Rocket Fuel
Nvidia’s rapid ascent is largely attributed to its pivotal role in the AI revolution. The company provides high-powered graphics processing units (GPUs) for data centers, essential components for AI development. Its chips are in high demand. The scarcity of these chips allows Nvidia to charge premium prices, translating into substantial profits. One analyst noted that Nvidia’s customers, including Microsoft, are among the most financially secure companies globally, capable of investing heavily in AI.
Nvidia’s financial performance has been nothing short of remarkable. In just a few years, its annual net income surged from under $10 billion to $76.8 billion. As of July 3, Nvidia was only about 3% away from the $4 trillion threshold. This growth is reflected in its stock performance, with year-to-date gains exceeding 18%.
Microsoft’s Diverse Portfolio: A More Balanced Approach
While AI is also accelerating Microsoft’s growth, the company boasts a more diversified portfolio. Microsoft’s business spans cloud computing, software, hardware, platforms like GitHub, LinkedIn, and Xbox, among other ventures. Microsoft has a lower price-to-earnings (P/E) ratio than Nvidia, suggesting a more grounded valuation relative to its growth rate. Microsoft’s net income has doubled over the past five years, and its stock price has followed suit. Furthermore, Microsoft has a history of stock buybacks and 15 consecutive years of dividend increases, offering a balanced capital-return program.
Justifying the Valuation: Earnings Growth is Key
For both Nvidia and Microsoft, sustaining their high valuations hinges on demonstrating continued earnings growth. The two biggest drivers of stock-price appreciation are earnings growth and investor sentiment. If earnings are increasing, investors will likely pay a higher price for the company’s shares.
Nvidia, in particular, must prove that its earnings growth is sustainable even if margins decline over time. However, one analyst suggested Nvidia doesn’t need parabolic growth to be a good investment. A 25% annual earnings growth, coupled with a 15% annual stock price gain, could lead to a significant reduction in its P/E ratio over five years.
Nvidia’s Projected P/E Ratio
Here’s a look at how Nvidia’s price-to-earnings (P/E) ratio would go from over 50 to under 35 in five years if it grew earnings at 25% per year, and the stock price gained an average of 15% per year.
| Metric | Current | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|---|
| Stock Price (15% Annual Growth) | $159.20 | $183.08 | $210.54 | $242.12 | $278.44 | $320.21 |
| Earnings Per Share (25% Annual Growth) | $3.10 | $3.88 | $4.84 | $6.05 | $7.57 | $9.46 |
| P/E Ratio | 51.4 | 47.2 | 43.5 | 40 | 36.2 | 33.8 |
Investment Considerations: Weighing the Risks and Rewards
Investing in Nvidia requires confidence in sustained AI spending and the company’s ability to adapt as the market evolves. The stock could sell off dramatically if investors believe an unforeseen risk will interrupt its growth trajectory. Microsoft, with its diverse revenue streams, may offer a more balanced investment option. As one analyst noted, AI is accelerating Microsoft’s earnings growth and expanding its earnings, but the company can still do extremely well even if AI investment slows and the industry matures.
While both companies are exceptional and poised for further growth, investors should be mindful of the increasing pressure to justify their rising stock prices with corresponding earnings growth.
Before investing in Nvidia, it’s worth noting that an analyst team identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them.
It wouldn’t be surprising to see them both surpass $4 trillion market caps and continue building from there.
