The AI Race: Have Microsoft (MSFT) and Nvidia (NVDA) Already Won?

Without question the market has developed a seemingly insatiable appetite for artificial intelligence (AI) technology and the companies that can lead this new frontier. Seen as the promising future, AI allows computers to learn and solve problems like humans by using (among other things) an advanced form of computer processing which includes machine learning and neural networks.

Given these immense capabilities, investor interest in AI stocks, namely Microsoft (MSFT) and Nvidia (NVDA), have skyrocketed over the past few months as the race to control the technology forges ahead. The money-making potential is immense. The generative AI market is currently growing at 42% and could hit $1.3 trillion by 2032, according to Bloomberg Intelligence estimates. The bulk of the revenue growth from generative AI, estimated $247 billion by 2032, will come from demand for the infrastructure needed to train AI models.

“The release of consumer-focused artificial intelligence tools such as ChatGPT and Google’s Bard is set to fuel a decade-long boom,” noted Bloomberg. What’s more, estimates suggests that the AI-assisted digital ads business could reach $192 billion in annual revenue by 2032, while revenue from AI servers could hit $134 billion. But just like other market trendy buzzwords that have captivated the investor community, not every company that puts out an “AI press release,” staking a claim of their piece of the pie, will thrive.

But if judging solely by their growth forecasts and stocks prices, there are two clear leaders at the moment: Microsoft and Nvidia. Microsoft’s AI advances became known with ChatGPT by way if its $10 billion investment in Open AI, giving Microsoft 33% ownership of the company. Many analysts referred to Microsoft’s AI bet as an “iPhone moment.” Since then, ChatGPT has become the fastest-growing technology in history, hitting 2 billion users after only six months. Estimates suggests it can reach 3.4 billion global users by the end of 2023.

Microsoft’s AI advances with its AI integration is being regarded as the best among the cloud giants – a group that includes Amazon (AMZN) and Google-parent Alphabet (GOOG , GOOGL). Estimates are calling for Microsoft ’s AI growth prospects to get a 33% boost. The challenge for investors in terms of valuation of Microsoft stock, what’s does that AI growth prospect equate to? Currently trading near all-time highs of $342, MSFT stock has risen 43% year to date, besting the 14% rise in the S&P 500 index.

Microsoft stock is more than 20% overvalued, according to several valuation metrics, including P/E which puts its fair value closer to $265. And that’s even when factoring three years worth of growth. The biggest risk in my book would be to assume that any of these conventional valuation metrics matter today. Microsoft’s AI-driven growth could push the stock towards $550 in the next five years, yielding 60% return or 12% annually.

Nvidia, which has soared 198% this year, skyrocketed close to 30% after its blowout first quarter earnings results and better-than-expected Q2 guidance. The stock gained $184 billion in one day, vaulting the stock north of a trillion-dollar valuation. Nvidia’s Q2 guidance and its proclaimed leading position as an AI chip supplier got investors excited, guiding for Q2 revenue of $11 billion, crushing estimates for revenue of $8.5 billion.

Nvidia CEO Jensen Huang has declared that generative AI represents an “iPhone moment.” Investors have since recognized the importance of Nvidia’s GPU data center accelerators which can potentially serve as the backbone for generative AI infrastructure. On the Q1 conference call with analysts, Nvidia’s CFO Colette Kress affirmed that belief that data centers will inevitably switch to Nvidia’s products incorporating AI. “Generative AI is driving exponential growth in compute requirements and a fast transition to NVIDIA accelerated computing,” Kress said.

Meanwhile, CEO Huang, in a press release, issued the sort of outlook that suggests Nvidia’s leadership in Generative AI is all but assured. “A trillion dollars of installed global data infrastructure will transition…to accelerated computing as companies race to apply AI to every product, service, and business process,” wrote Huang. The demand for Nvidia’s GPUs based on its Hopper and Ampere architecture was noticeable in its just-announced results.

Nvidia continues to enjoy not only tons of AI tailwinds, but also the company’s fundamentals continues to improve evidenced by its margin improvement. As such, despite the stock reaching all-time high levels, the best play here is to stay invested and add on any dips. NVDA stock is poised to reach $500 by the end of the year.

All told, this new AI frontier is getting crowded. It remains to be seen which companies ascend and which ones falter. But while AI has tons of room for growth, Microsoft and Nvidia have planted their flags and staked their leadership in this new frontier.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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