The artificial intelligence (AI) story has been the focus of investors in recent times, but in a different way than in earlier stages of this tech boom. In those initial quarters, investors piled into AI stocks, recognizing the potential of AI to transform businesses and drive earnings growth and share price performance. In many cases, they made the right bet, with hardware and services companies generating explosive growth. Nvidia (NASDAQ:NVDA) has been one of the biggest winners as it dominates the AI chip market.
But over the past year, investors have started to worry about the AI story, with the idea that tech giants building out infrastructure may be overspending. This has weighed on the performance of some of these stocks and prompted investors to pay particularly close attention to tech companies’ spending plans.
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Nvidia has continued to report double- and triple-digit growth, but its stock performance hasn’t been as eye-popping as in the past. For example, Nvidia stock climbed more than 1,100% over the past three calendar years, but the stock is only up 15% this year.
This week, however, Microsoft (NASDAQ:MSFT) said something that may be seen as quite positive for Nvidia. In fact, the tech powerhouse just announced incredible news for Nvidia shareholders. Let’s check it out.
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Nvidia’s GPU leadership
We’ll start with a quick summary of the Nvidia story so far. As mentioned, Nvidia leads in the AI chip market, selling the fastest graphics processing units (GPUs) around. The GPU fuels key AI tasks, such as training models and inference — that’s the process of actually “thinking” to address a problem. Nvidia entered the market ahead of rivals and has maintained its position through strong customer relationships, its vast ecosystem of products, and constant innovation.
All of this has helped power earnings higher, with revenue and profit climbing in the triple digits in the latest quarter. But investors have worried that any potential slowdown in tech spending could significantly hurt Nvidia. After all, data center sales make up 92% of Nvidia’s total sales.
Now this brings us to Microsoft, one of Nvidia’s biggest customers. You may know this tech company best for its popular software like Word and Excel, but Microsoft is also a massive player in the AI world. Microsoft’s cloud business serves a vast array of AI products and services to customers, and the company has been investing heavily in the infrastructure build-out to address growing demand.
Monitoring the pace of AI growth
This week, Microsoft reported fiscal 2027 first-quarter earnings, and as part of the report, it spoke of capital expenditures. Capex has been a major focus for investors, allowing us to monitor the pace of AI growth and better understand levels of demand.
Now, here’s the good news for Nvidia shareholders. Microsoft said that in the first quarter, about 75% of its capex went toward “short-lived assets,” mainly central processing units (CPUs) and GPUs. This suggests significant growth for Nvidia, as a provider of these products. (Central processing units are the main chips found in computers, and Nvidia recently launched its first stand-alone CPU. Prior to this, Nvidia wasn’t largely present in the CPU market, but shifted into this area as the CPU emerged as a critical tool powering AI agents.)
The news for Nvidia gets even brighter if we look at Microsoft’s capex forecasts: The company says that in the second half it expects capex to accelerate, again driven by spending on CPUs and GPUs. Microsoft forecasts $170 billion in capex for the calendar year. And all of this is based on ongoing high demand — so Microsoft isn’t building to serve what might unfold but instead to serve a trend that is already in place.
Microsoft, one of Nvidia’s main customers, clearly sees high demand for the chip designer’s key products and plans to continue spending heavily on them. And that means, even as some market participants worry about the AI spending environment, the actual situation continues to show strength. Nvidia’s earnings could continue to roar higher throughout the coming year, and that’s fantastic news for shareholders.
Should you buy stock in Nvidia right now?
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool has a disclosure policy.
