The fervor surrounding Artificial Intelligence (AI) ignited by the public debut of ChatGPT in November 2022 shows no signs of waning as we progress into 2024. Tech giants continue to invest billions in this technology, nations are stockpiling the essential chips for AI ambitions, and the discussions on the promises and challenges of generative AI persistently fuel debates in boardrooms and dining rooms worldwide.
With the buzz surrounding AI unlikely to fade away anytime soon, this article asses the fundamentals of two leading giants, Microsoft Corporation (MSFT) and NVIDIA Corporation (NVDA), which have fortified their foothold in the dynamic landscape of AI through relentless innovations.
The integration of AI is steadily gaining traction across diverse industries and sectors. Businesses are increasingly recognizing the significant potential of AI in driving innovation and improving efficiency, leading to a noticeable increase in the demand for AI-powered solutions.
According to Statista, the global market of AI is projected to reach a remarkable $305.90 billion this year and further escalate to a staggering $738.80 billion by 2030, growing at a 15.8% CAGR from 2024 to 2030
Meanwhile, Cognizant predicts a seismic shift in the U.S. economy, suggesting that generative AI technology has the potential to elevate U.S. productivity by 1.7% to 3.5% and expand GDP by an estimated annual value ranging somewhere between $477 billion and $1 trillion over the next decade.
In an effort to harness the vast potential of AI and bolster the United States' leadership in AI innovation, various initiatives have been undertaken by the Biden -Harris administration.
These include the launch of the National AI Research Resource pilot program, aimed at fostering widespread innovation, competition, and equitable access to AI research. Additionally, an AI Talent Surge has been initiated to expedite the hiring of AI professionals within the federal government, with a special emphasis on data scientists.
As the AI revolution continues to reshape industries and economies, MSFT and NVDA have emerged as two of the biggest winners, buoyed by their significant contributions and innovations in the AI space. However, with both the stocks trading at extremely high valuation compared to the industry norms, investors could closely watch these stocks for a more opportune entry point.
Keeping all these factors in mind, let’s now delve deeper into the fundamentals of the aforementioned stocks for a better perspective.
Microsoft Corporation (MSFT)
Commanding a market cap of over $3 trillion, software giant MSFT barely requires an introduction. Some of its notable offerings include Microsoft Office, SharePoint, Microsoft Teams, Office 365 Security, Microsoft Viva, Microsoft 365 Copilot, and LinkedIn.
On January 15, 2024, MSFT and Vodafone unveiled a 10-year strategic partnership aimed at harnessing their individual capabilities to provide scaled digital platforms to over 300 million businesses, public sector entities, and consumers throughout Europe and Africa.
Under this collaboration, both the companies will work together to revolutionize Vodafone's customer experience by integrating MSFT’s generative AI capabilities to expand Vodafone's managed IoT connectivity platform and redefine its global data center cloud strategy.
On December 11, 2023, MSFT, and the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) forged a pioneering partnership to facilitate dialogue on the role of AI in the workforce. This collaboration, the first of its kind between a labor organization and a tech giant, aims to ensure that AI development and implementation consider the needs and voices of workers.
The three key objectives of this partnership are: providing comprehensive information on AI trends to labor leaders and workers, integrating worker perspectives into AI technology development, and advocating for public policies that support the technological skills and requirements of frontline workers.
In terms of forward non-GAAP P/E, MSFT is trading at 34.99x, 26.3% higher than the industry average of 27.71x. Likewise, its forward Price/Sales multiple of 12.39 is 319.7% higher than the industry average of 2.95x. Also, the stock’s forward EV/Sales ratio of 12.45x is 328.2% higher than the industry average of 2.92x.
For the fiscal second quarter, which ended on December 31, 2023, MSFT’s total revenue increased 17.6% year-over-year to $62.02 billion. The company’s net income and EPS came in at $21.87 billion and $2.93, both representing an increase 33.2% from the prior-year quarter.
However, during the same quarter, MSFT’s cash and cash equivalents stood at $17.31 billion, declining 50.1% compared to $34.70 billion as of June 30, 2023.
The consensus revenue estimate of $60.86 billion for the fiscal third quarter (ending March 2024) represents a 15.2% improvement year-over-year. The consensus EPS estimate of $2.83 for the ongoing quarter reflects a 15.5% year-over-year surge. Additionally, the company has an excellent surprise history, surpassing its revenue and EPS estimates in each of the trailing four quarters.
Over the past year, the stock has climbed 65.8% to close the last trading session at $414.64.
MSFT’s POWR Ratings are consistent with this outlook. The stock has an overall C rating, translating to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a C grade for Growth and Momentum. In the 44-stock Software - Business industry, it is ranked #18. Click here to see MSFT’s ratings for Value, Stability, Sentiment, and Quality.
NVIDIA Corporation (NVDA)
Boasting a market cap of over $1 trillion, chip giant NVDA provides graphics, and compute and networking solutions internationally. The company’s products find application in gaming, professional visualization, data center, and automotive sectors.
On February 25, 2024, NVDA and ServiceNow, Inc. (NOW) expanded their partnership to introduce telco-specific generative AI solutions aimed at improving service experiences. The first solution, Now Assist for Telecommunications Service Management (TSM), utilizes NVIDIA AI on the Now Platform to increase agent productivity, accelerate resolution times, and improve customer satisfaction.
Chris Penrose, the global head of business development for telco at NVDA expressed that the telecommunications industry is undergoing rapid evolution with the integration of AI across enterprises. He highlighted that the partnership with NOW will empower telcos to harness generative AI to address their distinct challenges and create improved, resilient, and more efficient experiences.
In the same month, NVDA joined the U.S. Artificial Intelligence Safety Institute Consortium (AISIC) led by the National Institute of Standards and Technology (NIST) to enhance the safety, security, and reliability of AI.
This consortium aims to develop tools, methodologies, and standards for the responsible development and deployment of AI technologies. NVDA’s involvement underscores its commitment to collaborating with governments, researchers, and industries to ensure the safe and ethical advancement of AI.
In terms of forward EV/EBITDA, NVDA is trading at 26.78x, 76.5% higher than the industry average of 15.17x. Likewise, its forward Price/Sales multiple of 17.67 is 498.5% higher than the industry average of 2.95x. Also, the stock’s forward EV/Sales ratio of 17.30x is 491.5% higher than the industry average of 2.92x.
In the fiscal fourth quarter, which ended on January 28, 2024, NVDA’s revenue rose 265.3% year-over-year to $22.10 billion. The company’s non-GAAP net income came in at $12.84 billion and $5.16 per share, up 490.6% and 486.4% from the year-ago value, respectively. On the other hand, during the same quarter, NVDA’s total current liabilities stood at $10.63 billion, increasing 62% compared to $6.56 billion as of January 29, 2023.
Street predicts NVDA’s revenue and EPS for the fiscal first quarter (ending April 2024) to increase 235.8% and 402.5% year-over-year to $24.15 billion and $5.48, respectively. Moreover, the company topped its revenue and EPS estimates in each of the trailing four quarters, which is impressive.
NVDA’s shares have soared 240.8% over the past year and 103.1% over the past nine months to close the last trading session at $791.12.
NVDA’s mixed fundamentals are reflected in its POWR Ratings. It has an overall rating of C, which equates to Neutral in our proprietary rating system.
It has a D grade for Value, but a B for Quality. Within the 90-stock Semiconductor & Wireless Chip industry, it is ranked #24. Click here to see the other ratings of NVDA for Growth, Momentum, Stability, and Sentiment.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
MSFT shares were unchanged in premarket trading Friday. Year-to-date, MSFT has gained 10.20%, versus a 6.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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