Microsoft Corporation (MSFT) and NVIDIA Corporation (NVDA) are two well-established players in the technology space. With a $2.08 trillion market capitalization, MSFT develops, supports, licenses and sells a range of software products, services and solutions worldwide. It also designs, manufactures, and sells devices that include PCs, tablets, gaming and entertainment consoles, other intelligent devices and related accessories. NVDA designs and manufactures computer graphics processors, chipsets, and related multimedia software that are used in the gaming, professional visualization, datacenter, and automotive markets. It has a market capitalization of $495.98 billion.
While the technology industry witnessed a sell-off earlier this year, the continuation of remote working, at least in-part, along with a rising need for advanced technology by almost all industries, is motivating investors to bet on this space again. The resurgence of COVID-19 in several countries is also increasing investors’ optimism about the industry’s prospects. Investors’ interest in this space is evident in the iShares U.S. Technology ETF’s (IYW) 7.3% returns over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 2.1% returns. So, we believe both MSFT and NVDA, owing to their market dominance and fundamental strength, should benefit substantially in the coming months.
While MSFT gained 9.8% over the past month, NVDA returned 14%. In terms of their past six month’s performance, NVDA is a clear winner with 49.9% gains versus MSFT’s 26.3% returns. So, which of these stocks is a better pick now? Let’s find out.
Click here to check out our Software Industry Report for 2021
Latest Movements
On June 30, AT&T Inc. (T) collaborated with MSFT, to manage T’s mobile network traffic using MSFT’s Microsoft Azure technology. This will enable T to enhance productivity and deliver large-scale network services to meet customers’ needs. Also, MSFT will have access to T’s intellectual property to expand its Azure for Operators telecom offering and acquire T’s carrier-grade Network Cloud platform. Both the companies are looking forward to a long-term partnership.
Also in June, MSFT collaborated with Morgan Stanley (MS) to accelerate the firm’s digital transformation and shape future innovation in the financial services industry. By combining MS’ financial services engineering expertise with MSFT’s cloud and industry-specific experience, the partnership is intended to develop and co-design secure and compliant application infrastructure with data privacy that will fuel MS’ cloud transformation and enhance client, employee and developer experiences. By addressing increased cyberthreats and other challenges in the financial services industry, MSFT hopes this partnership will create additional collaboration opportunities in the financial services industry.
On July 06, 2021, NVDA launched Cambridge-1, the U.K.’s most powerful supercomputer, which will enable scientists and healthcare experts to use the powerful combination of AI and simulation to accelerate the digital biology revolution and bolster the country’s world-leading life sciences industry. Its first projects with AstraZeneca (AZN), GlaxoSmithKline (GSK), King’s College London etc. have helped it develop a deeper understanding of brain diseases, using AI to design new drugs and improving the accuracy of finding disease-causing variations in human genomes. NVDA hopes to provide advanced infrastructure for current and future generations to carry out groundbreaking research within the country.
On June 28, NVDA partnered with Alphabet Inc.’s (GOOGL) Google Cloud to establish the industry’s first AI-on-5G Innovation Lab. Providing access to Google Cloud’s Anthos Platform and NVDA’s accelerated computing hardware and software platform, this lab should enable network infrastructure players and AI software partners to develop, test and adopt solutions that will help accelerate the creation of smart cities, smart factories and other advanced 5G and AI applications.
Recent Financial Results
MSFT’s adjusted revenue came in at $41.71 billion for its fiscal third quarter, ended March 31, 2021, which represents a 19.1% year-over-year rise. The company’s gross profit increased 19.2% year-over-year to $28.66 billion. Its adjusted operating income is reported at $17.05 billion, up 31.4% from the prior-year period. While its adjusted net income increased 38% year-over-year to $14.84 billion, its adjusted EPS increased 39.3% year-over-year to $1.95. As of March 31, 2021, the company had $13.70 billion in cash and cash equivalents.
For its fiscal first quarter, ended May 2, 2021, NVDA’s revenue increased 83.8% year-over-year to $5.66 billion. The company’s non-GAAP gross profit increased 84.9% year-over-year to $3.75 billion. Its non-GAAP operating income came in at $2.56 billion, up 112.2% from the prior-year period. While its non-GAAP net income increased 106.5% year-over-year to $2.31 billion, its non-GAAP EPS increased 103.3% year-over-year to $3.66. The company had $978 million in cash and cash equivalents as of May 2, 2021.
Past and Expected Financial Performance
MSFT’s EBIT and net income grew at CAGRs of 22.5% and 52.6%, respectively, over the past three years. The company’s EPS has grown at a 53.7% CAGR over the past three years.
Analysts expect MSFT's revenue to increase 14.2% in the current quarter (ending September 30, 2021), 16.2% in the current year and 11.7% next year. Its EPS is expected to increase 7% in the current quarter, 34.9% in the current year and 6.8% next year. The stock’s EPS is expected to grow at 17.2% rate per annum over the next five years.
In comparison, NVDA’s EBIT and net income grew at 13% and 12.1% CAGRs, respectively, over the past three years. The company’s EPS has increased at a 12% CAGR over the past three years.
Analysts expect NVDA’s revenue to increase 37.9% in the next quarter (ending October 31, 2021), 49.3% in the current year and 10.6% next year. Its EPS is expected to increase 43.4% in the next quarter, 58.3% in the current year and 9.7% next year. However, analysts expect the stock’s EPS to grow at a rate of 26.8% per annum over the next five years.
Profitability
MSFT's trailing-12-month revenue is 8.3 times NVDA’s. MSFT is also more profitable with a 40.2% EBIT margin versus NVDA’s 29.6%.
Also, MSFT’s net income margin, ROE and ROTC values of 35%, 45% and 19.4%, respectively, compare favorably with NVDA’s 27.7%, 33.4% and 15.1%.
Valuation
In terms of non-GAAP forward P/E, NVDA is currently trading at 51.48x, which is 44.2% higher than MSFT’s 35.71x. NVDA’s 20.20x forward EV/Sales is 62.6% higher than MSFT’s 12.42x.
Also, in terms of forward EV/EBITDA, NVDA’s 48.87x is 88.5% higher than MSFT’s 25.92x.
Thus, MSFT is more affordable here.
POWR Ratings
While NVDA has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, MSFT has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
In terms of Stability, MSFT has been graded a B, in sync with the stock’s 0.79 beta. In comparison, NVDA’s D grade for Stability is consistent with its relatively high 1.38 beta.
MSFT has a C grade for Value, which is consistent with its slightly higher-than-industry valuation ratios. The company’s 32.14x trailing-12-month EV/EBIT value is 21.4% lower than the 26.49x industry average. However, NVDA’s D grade for Value reflects its overvaluation. The stock has an EV/EBIT value of 88.18x, which is 232.9% higher than the 26.49x industry average.
Of 132 stocks in the Software - Application industry, MSFT is ranked #17. NVDA is ranked #55 of 99 stocks in the Semiconductor & Wireless Chip industry.
In addition to the grades highlighted, we have rated both the stocks for Growth, Momentum, Quality, and Sentiment. Get all NVDA ratings here. Also, click here to see the additional POWR Ratings for MSFT.
Click here to checkout our Semiconductor Industry Report for 2021
The Winner
The current demand for tech products and solutions, along with reviving investor interest in the tech space, should allow both MSFT and NVDA to deliver substantial returns in the coming months. However, with MSFT scheduled to roll out Windows 11 in late 2021, the stock is expected to gain significant attention in the near term. In addition, MSFT’s higher profitability and relatively lower valuation make it a better buy than NVDA now.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software - Application industry, and here those in the Semiconductor & Wireless Chip industry.
Click here to check out our Software Industry Report for 2021
MSFT shares were trading at $277.75 per share on Friday afternoon, up $0.33 (+0.12%). Year-to-date, MSFT has gained 25.45%, versus a 17.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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