Nvidia, Microsoft are AI powerhouses

Nvidia Corp. (NDQ:NVDA) and Microsoft Corp. (NDQ:MSFT) have a lot in common as globally dominant companies who are leading the artificial intelligence revolution.

They are at opposite ends of the technology with Nvidia the dominant supplier of the processors that run data centres, while Microsoft designs the software to harness the power of Nvidia’s chips.

They are also each other’s best customers. In 2023, Microsoft spent $US 9 billion on Nvidia’s flagship Hopper processors for its Azure cloud services. Hopper has since been succeeded Blackwell, the next generation chip which is twice as fast and uses less energy.

Nvidia uses Microsoft’s Azure cloud services to power its AI and high-performance computing workloads.  Nvidia’s chips also power a lot of video games and the companies have a 10-year partnership to bring Microsoft’s Xbox to Nvidia’s cloud gaming service. This service lets gamers  stream games on various devices without needing powerful hardware.  

Among their strengths are investments in research and development, an asset that creates new products and improves existing ones. R&D shows up on the balance sheet as a cost and is written off right away, yet the benefit of the spending stretches out into the future.

In 2024, Microsoft spent a record US $29 billion, or 12% of revenues, on R&D. The money added features to its cloud and AI capabilities, built data centres to house servers and explored  such things as the metaverse and augmented reality.

 Nvidia spent $14.8 billion in its 2024 year, about 24% of revenue on R&D, the sort of spending that created its Blackwell chip.   

 Nvidia’s performance in the last two years has been in a class of its own. Its shares rose 239% in 2023 and adjusted for a 10-for-1 stock split another 190% in 2024. Microsoft rose 58% in 2023  and added 13% in 2024.

Nvidia and Microsoft sold off on the news that a Chinese startup called DeepSeek has created an almost-as-good AI option at a fraction of the price. Nvidia has a virtual monopoly on production of high-end AI compatible chips, so if DeepSeek’s capabilities are true, it would mean Nvidia’s dominance is under threat.

Competition was bound to arrive. It does not signal the end for Nvidia, but the arrival of choice.  Lower costs make AI cheaper which increases demand, which is how the PC revolution evolved. It will chip away at Nvidia’s dominance, but not replace it.

In the meantime, its R&D spending will ensure a stream of enhancements and new products.

Here’s are updates:

 Nvidia (NDQ: NVDA) Recent close $125.88. (All figures in US dollars.)

Background: Nvidia made its name with the graphic processor units used in gaming systems such as Microsoft’s XBox, but is now a leader in the chips used in artificial intelligence (AI) and cloud-based computing applications. These chips run such things as autonomous robots, self-driving cars, and drones. 

Performance: Nvidia’s shares are down 7% year-to-date, but are up 80% in the last 12 months.

Recent developments: Nvidia’s third quarter reported Nov. 24 beat expectations for sales and earnings. Revenue rose 94% to $35 billion with earnings per share of $0.81, 15% higher than a year earlier.

Subsequent to that, came the DeepSeek news. Nvidia CEO Jensen Huang has responded by emphasizing that lowering costs will expand the market for AI, not shrink it. He argued that affordable AI will lead to broader integration into applications, growing the overall pie for everyone.

Discussion & Outlook: Nvidia’s P/E ratio was 56.8 pre the DeepSeek news and has since dropped to 47. It goes without saying that high expectations are still built into the current price. But as with Microsoft, it is at the forefront of a technology in the early stages of adoption.   

Dividend: Nvidia pays a $0.16 annual payment which yields 0.03% at current prices. It also has an active share buyback program.

Microsoft (NDQ: MSFT)   Recent Close $413.2.  (All figures in US dollars.)

Background: Microsoft is the world’s largest software company. Its Windows operating system runs on about 90% of the world’s personal computers. Microsoft also owns LinkedIn and markets the Xbox gaming system. It is a leader in the evolving generative applications of artificial intelligence.

 Performance: The shares are up 15% in the last 12 months, but down 2% year-to-date.

Recent developments: Microsoft’s latest earnings showed $69.9 billion in revenue, up 12% year-over-year. Earnings per share (EPS) were $3.23, beating expectations. The Intelligent Cloud segment grew 19%, driven by Azure’s 31% revenue growth. Microsoft’s AI investments are paying off, with $13 billion in annualized AI revenue.

Microsoft’s reaction to DeepSeek was similar to Nvidia’s. CEO Satya Nadella said Microsoft CEO Satya Nadella sees DeepSeek’s success is good for the industry making AI more accessible and driving broader adoption. He said Microsoft remains committed to its $80 billion AI investment plan for 2025.

Dividend: Microsoft raised its quarterly dividend by 10.7% with the December payment to $0.83, its 23^rd year of increase. The annual rate of $3.32 yields 0.8%. It also announced a $60 billion share repurchase program.   

This is an update of an article that appeared in a recent issue of the Internet Wealth Builder.  For information on how to reprint this article please view this page.