Should You Pick Nvidia Over Microsoft?

Question: Why would you pay 30 times earnings for Microsoft stock (NASDAQ: MSFT) when you could buy Nvidia stock for 33 times earnings? You wouldn’t, especially when you consider three simple facts:

1. Growth: Nvidia’s revenue is growing at a much faster rate, over 80% annually in the last three years, while Microsoft’s revenue growth is around 12%.
2. Margins: Nvidia’s profit margins are above 60%, meaning a larger portion of their revenue growth translates into profits for shareholders. In contrast, Microsoft’s operating margins are also solid at 45% but lower than Nvidia’s.
3. Tariffs: Microsoft’s extensive cloud computing services and its large base of enterprise clients are likely to shield it from the most severe consequences of tariffs. Nvidia currently benefits from an exemption on semiconductors, shielding it from tariffs for the time being. Furthermore, major players in the tech industry, such as Amazon, Google, and Meta, are expected to maintain their robust investments in AI infrastructure expansion, even within the current economic environment.

Image by efes from Pixabay

Is Nvidia A Safe Bet?

While the term “safe haven” might come to mind for some, Nvidia’s past performance during market shocks suggests otherwise. For context, here’s how Nvidia has behaved in past shocks. During the 2022 inflation shock, NVDA dropped over 65%. In 2020, amid pandemic uncertainty, the stock fell over 35%. Most dramatically, during the 2008/2009 financial crisis, NVDA experienced an 85% collapse in value. So, NVDA stock is not exactly a safe stock. Our dashboard How Low Can NVIDIA Stock Go In A Market Crash? has a detailed analysis of how the stock performed during and after previous market crashes. 

However, it’s important to note that Nvidia’s stock has already experienced a significant correction, falling from a high of close $150 at the beginning of the year to below $110 now. For investors seeking a potentially more stable and high-performing alternative, consider the Trefis High Quality portfolio. This strategy has outperformed the market with over 91% returns since its inception, as demonstrated by its HQ performance metrics.

Nvidia’s AI Dominance

For investors who are optimistic about the long-term growth and widespread adoption of Artificial Intelligence, regardless of tariff considerations, Nvidia presents a potentially compelling long-term investment opportunity at its current valuation. This is primarily because Nvidia occupies a unique position as a key “arms provider” in the burgeoning AI race. Rather than betting on the success of any single AI company like Meta, Google, or Amazon, an investment in Nvidia is a bet on the fundamental infrastructure that powers the AI initiatives of all these major players.

Given that the AI race is still in its nascent stages, companies are currently making substantial investments in this crucial infrastructure. For example, Meta’s significant technology infrastructure capital expenditure, around $65 billion, demonstrates the immense scale of this ongoing investment in AI.

Potential Risks to Consider

Despite its compelling prospects, investing in Nvidia carries inherent risks that investors should consider. One potential downside is the possibility of earnings falling short of expectations, or a significant deceleration in growth from the current high of around 50% to a more moderate 30% in the near term, if companies prioritize conserving cash.

Another factor to consider is the potential for Nvidia’s customers to increasingly focus on developing more efficient AI models, which could lead to a reduced demand for continuously increasing volumes of their chips. Additionally, the stock is always susceptible to negative impacts from unforeseen and currently unpredictable events. Given these potential risks, investors should be prepared for the possibility of a substantial downside in the stock price, potentially as much as 40%. It’s important to note that selling during such a significant downturn would likely be counterproductive to long-term investment goals.

Long-Term Perspective

Despite these potential challenges, for long-term investors with a 3-5 year horizon who are comfortable with volatility, Nvidia at its current levels could represent an interesting entry point into the burgeoning AI market. For those seeking strategies to navigate market downturns and potentially capitalize on them, exploring options like the Trefis  Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors, or consulting a financial advisor with experience in bear markets could be beneficial. Remember, significant wealth can be generated in the market by those who maintain a calm and strategic approach during periods of volatility.

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates