This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Microsoft (NASDAQ: MSFT) is the world's second-largest company in terms of market capitalization, valued at $3 trillion as of this writing. The stock's impressive 67% jump in the past year -- fueled by its artificial intelligence (AI) prospects -- has played a key role in helping the tech giant reach that position.
However, Nvidia (NASDAQ: NVDA) has witnessed a much bigger jump in its market cap over the same period. It is now the sixth-largest company in the world, valued at $1.5 trillion, up from less than $500 billion a year ago. Microsoft, for comparison, was valued at $1.8 trillion a year ago. The following chart shows the magnitude by which Nvidia's market cap jump has outpaced Microsoft's over the past year.
NVDA Market Cap data by YCharts.
Just like Microsoft, Nvidia is reaping the benefits of growing AI adoption, though in a much bigger way. The semiconductor giant has been growing much faster than Microsoft, which explains why its stock price growth has outpaced the latter. However, can Nvidia sustain its faster growth and become more valuable than Microsoft by 2030? Let's find out.
Microsoft's AI business has gained impressive traction
Microsoft is providing AI-enabled software and services to customers. These include generative AI-powered web search through Bing, an AI-enabled web browser in the form of Edge, and an AI companion known as Copilot that aims to boost productivity through numerous tools, such as allowing users to create images from text prompts, draft documents, create presentations, and summarize emails, among other things.
Additionally, Microsoft is looking to capitalize on the growing demand for cloud-based AI services. The tech giant's Azure OpenAI service gives its customers access to multiple large language models on a pay-as-you-go model. As a result, Microsoft customers can develop generative AI applications without investing in expensive hardware.
The good part is that Microsoft's Azure OpenAI service has already gained solid traction. The company points out that "more than 18,000 organizations now use Azure OpenAI service, including new-to-Azure customers." This puts the company in a nice position to capitalize on the fast-growing and lucrative AI cloud computing market, which is expected to generate annual revenue of $274 billion in 2029, compared to $67 billion in 2024.
It is worth noting that Microsoft's cloud business has started growing at a faster pace than its rivals. The company's Azure cloud service recorded 29% growth in the third quarter of 2023, outpacing Google Cloud's jump of 22% and Amazon Web Services' 12% growth. Microsoft management pointed out that it saw an acceleration of 3 percentage points in Azure revenue thanks to AI. So, it won't be surprising to see the company gain more share of this fast-growing market.
In all, the rollout of AI across multiple Microsoft services could help the company generate an additional $100 billion in annual revenue by 2027, according to investment banking firm Evercore. That would be a big boost for Microsoft, given that it has generated $218 billion in revenue in the trailing 12 months. However, investors should note that the company believes its AI-focused business will scale up gradually.
What's more, a look at consensus growth estimates suggests that Microsoft's revenue is anticipated to increase in the mid-teens over the next couple of fiscal years.
MSFT Revenue Estimates for Current Fiscal Year data by YCharts.
AI is driving much stronger growth at Nvidia
While Microsoft is a play on the software side of the AI market, Nvidia sells the hardware on which the services that the former is selling are trained. For instance, OpenAI used an estimated 30,000 graphics cards from Nvidia to train ChatGPT. Market research firm Omdia estimates that Microsoft purchased an estimated 150,000 units of Nvidia's flagship H100 AI-focused graphics card in 2023.
Given that each of these graphics processing units (GPUs) is priced at an average of $40,000, Microsoft would have paid Nvidia an estimated $6 billion for these chips last year. Microsoft, however, is not the only customer in line for Nvidia's AI processors. Other tech giants, such as Meta Platforms, Amazon, Alphabet, Oracle, and Baidu, are also procuring Nvidia's AI chips to train AI models.
As it turns out, the demand for Nvidia's H100 processors is so strong that they reportedly command a waiting period of 36 weeks to a year. That's not surprising as Nvidia controls an impressive 85% of the market for AI chips, according to investment bank Raymond James. Given that the AI chip market is anticipated to grow at an annual pace of 38% through 2032 and generate annual revenue of roughly $384 billion, Nvidia's dominant position in this market explains why analysts are upbeat about the company's long-term growth.
According to Japanese investment bank Mizuho, Nvidia may even generate annual revenue of $300 billion by selling AI chips in 2027. Even though that estimate seems quite ambitious, it shows just how big of an impact AI will likely have on its business compared to Microsoft, whose AI-focused revenue in 2027 could be a third of Nvidia's, as per Evercore. This also explains why Nvidia's earnings are anticipated to grow much faster than Microsoft's.
Can Nvidia indeed be worth more than Microsoft?
According to consensus estimates, Nvidia's earnings could increase at an annual rate of 102% over the next five years. The company ended fiscal 2023 with earnings of $3.34 per share, meaning its bottom line could jump to $107 per share if it keeps doubling each year for the next five years. Using the Nasdaq-100 index's forward earnings multiple of 29 as a proxy for tech stocks, Nvidia's stock price could hit $3,100 in five years. That would be 5x the company's current stock price.
Microsoft, on the other hand, is predicted to clock annual earnings growth of 15% for the next five years. Using its fiscal 2023 earnings of $9.81 per share as the base, Microsoft's bottom line could increase to $19.73 per share after five years. That points toward a stock price of $572, using the Nasdaq-100's forward earnings multiple, an increase of just 41% from current levels.
So, Nvidia could become a bigger company than Microsoft before 2030 in terms of market cap, given the much faster growth it may achieve because of its dominant position in the AI chip market.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
