Question: Why would someone pay 30 times earnings for Microsoft stock (NASDAQ: MSFT) when Nvidia stock is available at 33 times earnings? It may not seem logical, especially when considering these three key factors:
- Growth: Nvidia’s revenue has been expanding at a significantly higher pace—over 80% annually over the past three years—while Microsoft has reported growth of approximately 12%.
- Margins: Nvidia maintains profit margins above 60%, allowing more of its revenue growth to convert into profits. Microsoft’s operating margins remain solid at 45% but still trail Nvidia’s.
- Tariffs: Microsoft’s expansive cloud services and large enterprise customer base could offer some insulation from the adverse effects of tariffs. Nvidia, on the other hand, currently enjoys a semiconductor exemption from tariffs. Moreover, leading tech firms such as Amazon, Google, and Meta are expected to sustain their investments in AI infrastructure despite current macroeconomic conditions.
Is Nvidia A Safe Bet?
Although Nvidia may appear to be a “safe haven,” its historical performance during market disruptions suggests caution. During the 2022 inflation shock, NVDA plunged over 65%. In 2020, amid pandemic-driven uncertainty, the stock declined more than 35%. Most notably, it lost 85% of its value during the 2008–2009 financial crisis. So, NVDA doesn’t exactly qualify as a safe stock. Our dashboard How Low Can NVIDIA Stock Go In A Market Crash? offers detailed insights into how Nvidia has performed during and after past market crashes.
Still, Nvidia’s stock has already corrected meaningfully, dropping from nearly $150 earlier this year to under $110 currently. Investors seeking a potentially more resilient alternative may want to explore the Trefis High Quality portfolio, a strategy that has returned more than 91% since inception, as shown by its HQ performance metrics.
Nvidia’s AI Dominance
For investors who believe in the long-term growth of Artificial Intelligence, Nvidia could be a compelling choice at its current valuation. The company holds a crucial position as an “arms supplier” in the AI revolution. Investing in Nvidia is effectively backing the infrastructure that powers AI development across major companies like Meta, Google, and Amazon.
As the AI boom is still in its early phases, companies continue to invest heavily in supporting infrastructure. For instance, Meta’s projected capital expenditures for tech infrastructure stand at around $65 billion—illustrating the magnitude of ongoing AI investments.
Potential Risks to Consider
Despite its attractive potential, Nvidia carries risks that should not be overlooked. Earnings may fall short of projections, and growth could decelerate from the current 50% rate to a more modest 30%, especially if firms begin conserving cash.
There’s also a possibility that Nvidia’s clients will prioritize building more efficient AI models, reducing their need for an ever-expanding volume of chips. Moreover, unexpected developments can adversely affect the stock. Investors should be aware of the potential for a 40% drop in share price under adverse conditions. However, selling amid such a downturn could undermine long-term investment goals.
Long-Term Perspective
Despite these headwinds, long-term investors with a 3–5 year horizon who are comfortable with market volatility may find Nvidia attractive at current levels. For those interested in strategies designed to navigate downturns, the Trefis Reinforced Value Portfolio has consistently outperformed a blended benchmark of all-cap stocks, including the S&P 500, S&P mid-cap, and Russell 2000 indices. Alternatively, investors could consider consulting with an advisor experienced in bear market strategies. Staying calm and strategic during turbulent markets can lead to significant long-term gains.
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