Better Artificial Intelligence (AI) Stock for 2025: Nvidia vs. Microsoft

Nvidia (NASDAQ: NVDA) and Microsoft (NASDAQ: MSFT) are leading players in the field of artificial intelligence (AI), having both significantly contributed to making this technology widely used.

In November 2022, the AI trend gained immense momentum following the launch of ChatGPT, a popular chatbot developed by Microsoft and OpenAI. However, the impressive performance of ChatGPT was made possible by Nvidia's advanced graphics processing units (GPUs), which were essential for training its large language model (LLM). As competition from other tech giants in the AI arena intensified, the demand for Nvidia’s chips skyrocketed, greatly boosting its revenue and profits.

In contrast, Microsoft has experienced a more gradual transformation thanks to AI, investing billions to enhance its AI data center infrastructure. This investment strategy is anticipated to yield returns over the next 15 years, which helps explain the substantial difference in stock performance between Nvidia and Microsoft in recent years.

Nvidia has outperformed Microsoft substantially in stock growth. But as we look ahead to 2025, will Nvidia maintain its lead over Microsoft? Let’s explore.

Microsoft's AI Growth Gains Momentum Amid Nvidia's Challenges

Microsoft's integration of AI into its business model is starting to pay off more visibly. In fiscal year 2024, which concluded on June 30, Microsoft's revenue reached $245 billion—a 16% increase from the previous year. Additionally, adjusted earnings rose by 20% year-over-year, reaching $11.80 per share. However, the projected revenue growth of 14% for fiscal 2025, resulting in an estimated $278.6 billion, and an expected earnings increase of 10.5% to $13.04 per share, seems relatively modest.

Looking ahead to fiscal 2026, which starts in July 2025, the outlook remains unchanged with an estimated 14% revenue growth and a 15% increase in earnings.

In stark contrast, Nvidia anticipates remarkable growth, expecting its revenue to surge by 112%, reaching $129 billion by the end of its current fiscal year in January 2025. This growth is projected to continue with a further 52% increase to approximately $196 billion in the following fiscal year. Nvidia's earnings are also projected to rise impressively, with a 128% jump this fiscal year and a subsequent 50% increase next year.

These figures suggest that Nvidia is likely to continue outpacing Microsoft in growth rates throughout the upcoming year. Furthermore, forecasts indicate Nvidia's stock might climb by 33% over the next 12 months, while Microsoft is expected to see a 20% increase. Given this data, it seems Nvidia has favorable odds to outperform Microsoft in 2025, largely due to the sustained high demand for its AI data center GPUs.

However, there are several potential concerns that could hinder Nvidia's stock performance. These include possible restrictions on selling AI chips to foreign markets, high valuation pressures, and initiatives from key customers to reduce their dependence on Nvidia chips. Additionally, although Nvidia's growth rate remains strong, it is showing signs of slowing down, which could lead to a decrease in its stock appeal in 2025. Conversely, Microsoft's incremental but forward-moving approach in specific AI-focused sectors could pave the way for substantial growth in the long term.

Microsoft is already seeing significant gains in the cloud computing sector attributable to AI technologies. In the first quarter of fiscal 2025, revenue from Microsoft’s cloud services, including Azure, increased by 33%, with AI driving 12 percentage points of that growth. Crucially, AI is opening doors for Microsoft, leading to more substantial contracts for its Azure solutions.

This trend is reflected in a 22% rise in Microsoft's commercial remaining performance obligations (RPO) in Q1 2025, totaling $259 billion. The RPO indicates the total value of unfulfilled contracts, and the increase outpaces revenue growth. Microsoft anticipates recognizing 40% of its RPO as revenue within the next year, representing a 17% year-over-year increase.

This development suggests that Microsoft may exceed Wall Street growth expectations in the coming year. Although Nvidia might also surprise investors, the company's potential struggles could allow Microsoft to seize more market share.

The risk of export restrictions affecting Nvidia’s chip sales—56% of its revenue derives from international clients—could threaten its exceptional revenue growth. Nevertheless, the enforcement of these measures is set 120 days out, giving the next administration a chance to reassess them.

On a positive note, Nvidia is making significant efforts to ramp up production of its latest Blackwell AI processors to meet the high demand from customers, along with a notable increase in AI infrastructure spending by U.S. companies. This focus might enable Nvidia to maintain impressive growth figures heading into 2025.

Investment Strategies

While uncertainties surround Nvidia, some investors might be tempted to lean towards Microsoft stocks to benefit from the ongoing AI boom, especially considering its more attractive valuation. Microsoft currently trades at approximately 34 times its earnings, significantly lower than Nvidia’s 52 times earnings ratio.

However, Nvidia's forward earnings ratio of 31 aligns closely with Microsoft's, supporting the notion that its remarkable growth outlook justifies this valuation. Thus, Nvidia remains a compelling AI stock to consider, with potential buying opportunities amidst its recent challenges, given its vast addressable market that could help navigate regulatory headwinds.

On the other hand, Microsoft represents a solid long-term investment due to its massive opportunities in the cloud computing and workplace collaboration sectors, expected to supercharge its growth trajectory.

Therefore, depending on individual risk tolerance, investors might want to consider investing in either of these two AI powerhouses, both of which are well-positioned for success in 2025 and beyond, thanks to their extensive market opportunities driven by AI.

Disclaimer: The author has no positions in any of the stocks mentioned. The companies mentioned may hold investments by other entities.

Nvidia, Microsoft, AI