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Nvidia has the best product, but its real edge is having the best customers: Morning Brief
Nvidia has the best product, but its real edge is having the best customers: Morning Brief

Yahoo

time10-07-2025

  • Business
  • Yahoo

Nvidia has the best product, but its real edge is having the best customers: Morning Brief

Why stop at $4 trillion? Nvidia (NVDA) bulls are looking to the next milestone: a market cap of $5 trillion. It's not particularly farfetched to imagine Nvidia becoming the first publicly traded company to grab both of those records. It was just over two years ago that Nvidia joined the $1 trillion club, riding the excitement over the breakout success of ChatGPT and reaping the rewards of building out an AI-focused data center business before AI became an earnings call buzzword. The stock is up 21% this year, the best performer in the Magnificent Seven behind only Meta (META), which has been busy building an ultra-niche Avengers team of highly-paid AI experts. "There is one company in the world that is the foundation for the AI Revolution and that is Nvidia with the Godfather of AI Jensen having the best perch and vantage point to discuss overall enterprise AI demand and the appetite for Nvidia's AI chips looking forward," wrote Wedbush analyst Dan Ives in a note on Wednesday. Nvidia's chips are at the forefront of the generative AI boom. The company has shed earlier concerns of being less well suited for use in AI models after they are trained and has benefited from countries vying to keep their AI data centers within their borders. Nvidia has also managed to shake off regulatory concerns at home. It pays to have a superior product. But Nvidia's empire was also built by having the best customers. As my colleague Dan Howley has reported, the biggest players in tech, each in command of vast fortunes and attempting to execute on grand ambitions, are spending hundreds of billions of dollars on the company's hardware. Tech behemoths, including Amazon (AMZN), Google (GOOG), Meta, Microsoft (MSFT), and Tesla (TSLA), rely on Nvidia's products to build out their data centers. The cloud-based AI offerings and internal AI models at the heart of the latest tech transformation have generated an industrywide line item paid out to Nvidia. The symbiotic relationship also favors Nvidia because the major tech platforms sit downstream of its chip supply. It's true that every player in the AI ecosystem is taking on huge risks. DeepSeek unleashing a brief investor panic was a painful reminder of that. But where the tech platforms have to eventually deliver on new, AI-centered services, fulfill promises and hype around building novel consumer habits, and usher in a new age of automated agents, all Nvidia has to do is keep selling chips. That's an oversimplification. And the fates of chipmakers and AI service providers are and will be intertwined. But the point stands: The onus of justifying enormous AI investments will fall more on the companies that have yet to profit from them. The tech giants still have to convince the rest of us to use and keep using their newfangled AI tools. All the while, Nvidia will be cashing checks from further up the hype chain. Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data

Nvidia vs. Microsoft Stock: Which Will Be the First $4 Trillion Company?
Nvidia vs. Microsoft Stock: Which Will Be the First $4 Trillion Company?

Yahoo

time06-07-2025

  • Business
  • Yahoo

Nvidia vs. Microsoft Stock: Which Will Be the First $4 Trillion Company?

Nvidia and Microsoft are knocking on the door of $4 trillion market caps. Nvidia deserves a lot of credit for being the backbone behind AI development. AI has added to Microsoft's investment thesis rather than redefining it. 10 stocks we like better than Nvidia › On Dec. 26, 2024, Apple crossed $3.9 trillion in market capitalization, putting it just 2% away from becoming the world's first $4 trillion company. But it didn't get there. Apple has recovered in recent weeks but remains down big year to date, whereas Nvidia (NASDAQ: NVDA) and Microsoft (NASDAQ: MSFT) just made new all-time highs. Here's why Nvidia will likely become the first company to surpass $4 trillion in market value, what Nvidia and Microsoft must do to continue rising in price, and whether either growth stock is a buy now. In less than three years, Nvidia has gone from billions to trillions in market cap. And now, it is the closest company to $4 trillion -- a little over 3% away as of market close on July 3. Nvidia will likely reach $4 trillion before Microsoft simply because it is closer to the threshold, and its stock is more volatile. Nvidia is now up over 18% year to date (YTD), but it was down around 30% YTD in early April during the worst of the tariff-induced sell-off. So it's not unreasonable that the stock could move a few percentage points higher to pole-vault its market cap above $4 trillion. The better question isn't whether Nvidia or Microsoft will hit $4 trillion in market cap but rather what each company must do to justify that valuation. The two biggest drivers of stock-price appreciation are earnings growth and investor sentiment. If earnings are increasing, investors will likely pay a higher price for the company's shares. But if investors expect the pace of earnings growth to accelerate, then they may be willing to give a stock a premium valuation. Nvidia and Microsoft have been such strong performers in recent years because they are growing earnings and investors are willing to pay a premium price for these companies relative to their earnings. Nvidia went from making under $10 billion in annual net income to a staggering $76.8 billion in just a few years. Microsoft has doubled its net income over the past five years, and its stock price has more than doubled as well. For Nvidia and Microsoft to continue being good investments going forward, both companies must demonstrate that their earnings growth is sustainable and not temporary. Nvidia has greatly benefited from the rapid rise of big tech spending on artificial intelligence (AI). Nvidia has a dominant market share in providing high-powered graphics processing units (GPUs) for data centers and associated AI solutions for enterprises. Due to limited supply and high demand, Nvidia can charge top dollar for its AI offerings, which allows it to convert over half of its sales into pure profit. And because Nvidia's customers are some of the most financially secure, big-budget companies in the world (like Microsoft), then Nvidia knows its customers can afford to spend a ton on AI. However, that wouldn't be the case if challenges arise for key Nvidia customers if there is an industrywide slowdown or if competition comes along and erodes Nvidia's margins. Buying Nvidia now is a bet that the company can continue growing its earnings even if its margins gradually decline over time. The good news is that Nvidia doesn't have to double its earnings every year to be a great buy. Even if it grows earnings at, let's say, 25% per year, it could still reduce its valuation over time and be a market-beating stock. Here's a look at how Nvidia's price-to-earnings (P/E) ratio would go from over 50 to under 35 in five years if it grew earnings at 25% per year, and the stock price gained an average of 15% per year. Metric Current Year 1 Year 2 Year 3 Year 4 Year 5 Stock Price (15% Annual Growth) $159.20 $183.08 $210.54 $242.12 $278.44 $320.21 Earnings Per Share (25% Annual Growth) $3.10 $3.88 $4.84 $6.05 $7.57 $9.46 P/E Ratio 51.4 47.2 43.5 40 36.2 33.8 Under these assumptions, Nvidia's stock price roughly doubles in five years, but its earnings triple, so the P/E ratio falls considerably. The key takeaway is that Nvidia doesn't have to sustain its parabolic growth to be a good investment. However, the stock could sell off dramatically if investors believe an unforeseen risk will interrupt its growth trajectory. We got a taste of that in April when Nvidia estimated it would incur multibillion-dollar charges due to tariffs, and the stock price nose-dived in a short period. In sum, investors should only consider Nvidia if they are confident in sustained AI spending and the company's ability to pivot as the market matures. Microsoft may be a better choice for investors seeking a more balanced tech stock to purchase. Microsoft has a lower P/E than Nvidia, and for good reason, because it isn't growing as quickly. However, Microsoft also doesn't need a lot to go right for it to continue growing steadily over time. The vast majority of Nvidia's earnings are directly tied to AI. Microsoft has a diverse earnings profile, encompassing cloud computing, software, hardware, platforms such as GitHub, LinkedIn, and Xbox, as well as other areas. AI is accelerating Microsoft's earnings growth and expanding its earnings, but the company can still do extremely well even if AI investment slows and the industry matures. It's also worth mentioning that Microsoft routinely buys back its stock and has raised its dividend for 15 consecutive years. So it has a more balanced capital-return program than Nvidia, which rewards shareholders by growing the core business rather than directly returning capital. Nvidia and Microsoft are exceptional companies. It wouldn't be surprising to see them both surpass $4 trillion market caps and continue building from there. However, investors should be mindful that both companies are seeing their stock prices rise faster than their earnings are growing, which puts pressure on them to bridge the gap between expectations and reality. Before you buy stock in Nvidia, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Nvidia wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor's total average return is 1,060% — a market-crushing outperformance compared to 180% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 30, 2025 Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy. Nvidia vs. Microsoft Stock: Which Will Be the First $4 Trillion Company? was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data

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