Nvidia and Microsoft, two giants riding the AI wave, are typically viewed as growth stocks. Yet current market valuations suggest they may also fall into value territory, offering a rare opportunity for investors. Microsoft trades at 22.9 times trailing earnings and 19.9 times forward earnings, both below the S&P 500's multiples of 25.6 and 21.7, respectively. Nvidia, though pricier on trailing earnings, trades at 23.5 times forward earnings and just 16.5 times next year's earnings estimates, given Wall Street's expectation of over 40% revenue growth next year. This makes both stocks look undervalued relative to their potential.
Are They Really Value Stocks?
Microsoft's current valuation is historically low, trading below the broader market for the first time in years. The software giant's forward P/E of 19.9 is a rare bargain for a company with a dominant cloud business and AI revenue surging 123% year over year to $37 billion last quarter. Nvidia's valuation is more nuanced: while its trailing P/E is elevated, its forward P/E of 23.5 is only a slight premium to the market. When measured against next year's earnings, Nvidia's P/E drops to 16.5, making it appear cheap if the stock price holds steady. For investors, these metrics suggest both companies are trading at discounts that could lead to explosive returns.
AI Opportunities and Risks
Nvidia is at the heart of the AI infrastructure build-out, supplying GPUs to hyperscalers like Microsoft. Its future is tied to the ongoing demand for computing power, which is expected to last at least until 2030. The chipmaker's revenue growth is staggering, with Wall Street forecasting 96% growth next quarter. However, questions linger about its business model a decade from now. Microsoft, on the other hand, is spending heavily on data centers to support AI workloads. Its cloud business grew 40% last quarter, but the long-term payoff of its hundreds of billions in capital expenditure remains uncertain. If AI software fails to deliver, Microsoft's data center investments could become a liability.
The Better Bet for the Next Five Years
Given the early stage of the AI build-out, Nvidia appears to have more upside. Its revenue growth is not fully priced into the stock, and the demand for its hardware is clear. Microsoft, while a solid investment with less risk, has less upside potential due to its massive spending and uncertain returns. For investors seeking exposure to AI with a value tilt, Nvidia stands out as the better pick over the next five years.