Nvidia Set to Benefit from Microsoft's Massive AI Investment

Microsoft (MSFT -1.32%) made waves recently by announcing an incredible $80 billion investment this year aimed at constructing data centers focused on training artificial intelligence (AI) models and managing cloud-based applications globally. Notably, more than half of this funding is designated for projects within the United States.

To grasp the scale of Microsoft's spending on AI infrastructure, it's important to note that this amount surpasses the gross domestic product (GDP) of various nations, including Croatia and Lithuania, among others.

Microsoft's Azure cloud platform has emerged as a significant victor in the AI space, boasting a remarkable 33% year-over-year revenue increase last quarter, with Azure's usage of OpenAI doubling over the last six months. However, Microsoft has indicated that its growth potential might be even more substantial were it not for existing capacity constraints; demand for AI services has outpaced the current supply.

There were hints suggesting a forthcoming expansion of data centers by Microsoft, which had already secured $108.7 billion in finance leases for data centers that were yet to be built. These leases are set to take effect between fiscal years 2025 and 2030, with varying lease terms from one to 20 years.

Nvidia Will Emerge as the Major Beneficiary

Given the robust demand for cloud services, Microsoft's increase in data center expenditure is likely to boost its operations significantly. Moreover, it is anticipated that Nvidia (NVDA -3.00%) will emerge as the primary beneficiary of this investment. Although not all of the $80 billion is earmarked for graphics processing units (GPUs) and AI accelerators—Nvidia's area of expertise—a substantial portion certainly will be.

For context, Microsoft's capital expenditures for fiscal year 2024, which concluded in June, amounted to $44.5 billion, with the majority directed toward data centers and cloud computing. The company has revealed that approximately half of its capex is aimed at assets with long-term viability, while the remaining funds are allocated to central processing unit (CPU) and GPU servers.

In fiscal 2024, Microsoft was Nvidia's largest customer, purchasing about 485,000 GPUs, which is more than double the quantities bought by its next biggest buyer, Meta Platforms. Given the trajectory of Microsoft's spending, it is poised to invest even more in GPUs in 2025 compared to 2024, marking a significant opportunity for Nvidia.

Moreover, Microsoft's existing leases indicate that it continues to plan for substantial data center spending this year. If $40 billion of its capex is allocated to long-lived assets like leases, then it's likely less than half of these leases will be activated this year.

Furthermore, the announcement of this extensive spending initiative may prompt additional AI infrastructure investments from Nvidia's other clients. Major tech firms such as Alphabet and Meta Platforms have voiced the importance of AI, cautioning that the biggest risk lies in underspending rather than overexerting resources. With many influential executives in tech competing to dominate the AI sector, it is likely that other prominent hyperscalers will increase their investments.

Nvidia currently holds a dominant position in the GPU market, with approximately 90% market share. Its CUDA software platform, which allows developers to customize its chips for diverse tasks, has established a strong competitive advantage for the company. As competitor Advanced Micro Devices continues to lag in software capabilities, Nvidia appears well-positioned to remain the leading force in AI infrastructure.

Potential competition for Nvidia may arise from custom AI chips designed by companies like Broadcom and Marvell Technology, which tailor chips for specific tasks, potentially outpacing GPUs in efficiency. However, these chips are often customized for particular customers, and for widespread deployment, Nvidia's GPUs remain the fastest and most user-friendly option for developing substantial AI infrastructure projects, ensuring Nvidia's continued large market share.

Prospects for Nvidia's Stock

Nvidia possesses expansive opportunities as businesses increasingly invest in AI infrastructure. The fact that its largest client is significantly elevating its investments in this area is a positive indicator for the chipmaker as it anticipates considerable growth in 2025.

Currently, Nvidia's stock presents an appealing valuation derived from a forward price-to-earnings ratio (P/E) of about 31.4, as per the projections for 2025. Additionally, it has a price/earnings-to-growth ratio (PEG) of 0.98, which indicates that the stock is undervalued, as a PEG below 1 is generally viewed favorably, particularly concerning growth stocks that tend to command higher PEG ratios.

With Nvidia poised to be the primary beneficiary of Microsoft's $80 billion investment in data centers and its stock trading at a compelling price, it remains an attractive choice for investors looking for growth opportunities in the tech sector.

Note: The authors of this article hold no positions in the stocks mentioned. The information provided is for educational purposes only and should not be considered financial advice.

Microsoft, AI, Nvidia