Microsoft vs. Nvidia: Which Is the Better AI Stock to Own for the Next 3 Years?

Microsoft (NASDAQ: MSFT) and Nvidia (NASDAQ: NVDA) are two heavyweights in the technology world and key players in artificial intelligence (AI). Microsoft seems to have its hand in every tech market segment, especially anything involving enterprise customers. Meanwhile, Nvidia has become the de facto leader in GPU chips used in AI data centers.

Both stocks have made investors very wealthy over the years. But which of these top AI stocks is the better buy for the next three years? This article will explain why I like Microsoft a tad more. Although, as you'll see below, it's hard to go wrong with either one.

Image source: The Motley Fool.

Vera Rubin likely means Nvidia has more growth ahead

Nvidia has enjoyed one of the most impressive growth spurts in history over these past few years as the AI build-out juiced demand for its GPUs. This supercycle continues to rage on. Vera Rubin, Nvidia's next-generation AI chip platform, is in full production and could begin shipping later this year. CEO Jensen Huang has laid out expectations for $1 trillion in orders for Vera Rubin and Grace Blackwell chips through 2027.

Wall Street analysts estimate that Nvidia's business could double over the next couple of years, from trailing-12-month revenue of $253 billion to $392 billion this fiscal year, and $554 billion the following year. Nvidia's valuation is already well below its high at less than 19 times sales, and it might become much cheaper as these next 24 months play out.

Microsoft is pivoting to capitalize on its enterprise customer base

Microsoft originally tied its AI hopes to OpenAI. Although Microsoft has done well with its OpenAI investment and enjoyed significant cloud computing growth as a result of the partnership, it has still struggled to establish itself as a key AI player. Users, especially enterprises, have opted for Anthropic's Claude among other AI models. As a result, Microsoft shifted to a multi-model strategy and has reportedly considered adding open-source models to Copilot Cowork to lower token costs.

Investors should applaud Microsoft's willingness to adapt. The company has deeply entrenched relationships with the enterprise world, which gives Microsoft more margin for error in fine-tuning its AI strategy than most companies. Plus, Microsoft's Azure remains a formidable growth engine, with a staggering $627 billion in remaining commercial performance obligations.

Why Microsoft is the better buy

Nvidia's data center business has grown so much that the stock has become a concentrated investment in this ongoing supercycle. That means Nvidia has a sky-high ceiling with Vera Rubin shipping soon, but it's riskier in that the floor is much lower if companies stop pouring all this money into AI infrastructure. Meanwhile, Microsoft remains highly diversified across software, cloud computing, and AI. That lowers the company's ceiling, but it's also the safer stock.

Microsoft's impressive track record typically earns it a premium valuation. The stock has traded at an average of almost 33 times its trailing-12-month earnings over the past decade, but trades at just 22 times its earnings today. Meanwhile, Wall Street analysts expect the company to grow earnings by 16% to 17% annually over the next three to five years.

While some may opt for Nvidia's immense growth potential, Microsoft rarely offers a valuation compelling enough to buy into.

Justin Pope has positions in Microsoft. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool has a disclosure policy.