To The Moon

On 30 Nov 2022 when ChatGPT was first unveiled to the world (by OpenAI), it allowed us to imagine all the possibilities, when it comes to Artificial intelligence.

Fast forward 2½ years, $NVIDIA(NVDA)$ has emerged as the de-facto leader when it comes to all things AI.

It had a phenomenal run in the past few years, riding high on GPU demand. However, there is one stock that is also building a bigger moat.

$Microsoft(MSFT)$ , a global technology giant that has embedded artificial intelligence (AI) into every layer of its ecosystem - slowly but surely.

Both Nvidia and Microsoft are currently challenging each other to become the world's most valuable company, with the latter's approach enabling it to surpass Nvidia significantly by next year.

What are the 3 compelling reasons ? See below.

(1) An AI-powered ecosystem

NVDA primarily focuses on developing the hardware & software infrastructure needed to drive the ongoing AI revolution.

In contrast, MSFT has built a strong presence across both AI infrastructure & AI application markets.

MSFT is leveraging AI technologies to increase performance and lower costs across the entire technology stack, including data center design, hardware, system software, and model optimization.

After that, MSFT monetized its AI technologies in different ways:

• Directly. Use of Copilot virtual assistant across apps like Microsoft 365, Dynamics 365 and GitHub.

• Indirectly. Through 3rd party apps built using MSFT’s Azure AI services.

At the same time, MSFT is also scaling up its AI infrastructure rapidly and released the Phi family of small language models (38 million downloads) and BitNet b1.58, that runs on CPUs.

This reduced MSFT's dependency on GPUs, that can help lower costs and broaden AI accessibility.

MSFT tools & platforms such as GitHub, Visual Studio Code, and Power Platform are increasingly used by developers to build AI applications.

This is creating a strong network effect, as the value of these offerings rapidly increases with new insights provided by the existing developer base, attracting even more developers.

MSFT has also processed over 100 trillion tokens (such as ID tokens, access tokens, or refresh tokens, that are used for user authentication) in the third quarter, a 5 fold increase on a YoY basis.

This massive scale has given the company a strong data advantage in operational & optimization insights, which hardware players cannot replicate.

Third-quarter fiscal 2025 results highlight the success of MSFT's AI strategy.

Azure and other cloud services revenue rose +33% YoY, with AI services contributing 16% points to that growth.

The company also reported a 3 fold increase in Microsoft 365 Copilot use and a 4 fold increase in GitHub Copilot use on a YoY basis.

(2) Sticky customer base

Enterprise customers extensively used Microsoft's business productivity products over the past decade.

Since these products are deeply embedded in the company's infrastructure, clients find it challenging to switch to competitors.

The enterprise software is seeing even better (a) customer retention rates and (b) recurring revenue with AI integration.

Furthermore, MSFT's long-term enterprise relationships also provide cross-selling and distribution opportunities, an advantage that pure-play AI companies are unable to replicate.

With more than 230,000 organizations, including 90% of companies that make up the Fortune 500, use the company's virtual assistant, Copilot.

Unlike Nvidia's GPU sales, which are one-time transactions, Microsoft's AI services generate recurring revenue streams.

In times of challenging economic conditions, companies might opt to delay GPU purchases but are less likely to eliminate mission-critical software that runs operations daily.

(3) Diversified business

Microsoft generates revenue from a diverse range of sources, including:

• Cloud computing infrastructure.

• Suite of productivity applications.

• Gaming.

• Advertising.

As a result, this has significantly reduced company's business concentration risk stemming from overreliance on a single or a few markets.

All these strategies have led to exceptional revenue visibility.

MSFT ended the third quarter with commercial remaining performance obligations (RPOs) of $315 billion, representing a +34% YoY increase.

MSFT's 98% annuity revenue model offers more predictable cash flows compared to NVDA's bulk GPU sales, that are highly dependent on (a) semiconductor cycles and (b) ongoing AI infrastructure build-outs.

NVDA's investment case becomes even riskier when we consider the increasing competition from companies such as $Advanced Micro Devices(AMD)$, $Intel(INTC)$, and hyperscalers developing in-house chips.

As costs of AI inference workloads rise, more clients will prefer to shift workloads from costlier GPUs to less expensive CPUs or seek software services that can postpone the obsolescence of existing GPUs.

Lest we forget, increased export restrictions on NVDA's GPU sales to China and other international markets also pose a significant headwind.

This can hurt the chipmaker's top line from current quarter and into coming years.

MSFT - Buy Time?

Microsoft currently trades at 26.2x forward earnings, that is lower than its 5-year average of 33.2x.

Despite this, valuation is at a premium, especially for a company that is not only in AI but is also a major software company.

Therefore, some investors may be uncomfortable paying premium AI valuations for traditional software businesses.

Looking at things in perspective, in the 3rd quarter, MSFT's operating margins rose +1.0% YoY to 46% , and cash flow (from operations) surged +16% YoY to $37 billion.

The company also maintains a cash and investments balance of $79.6 billion, that ensures strong financial flexibility.

Lastly, management remains committed to returning value to shareholders, as evidenced by the $9.7 billion dividends payout and share repurchases, a +15% YoY increase.

Against this backdrop, it does seem pretty plausible for the company to definitively emerge as the most valuable AI stock in 2026.

Now may be the right & smart time to buy at least a small stake in MSFT, no ?

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