Key Points
Microsoft is trading at a discount to the S&P 500.
Nvidia is expecting several more years of strong AI growth.
There are several great artificial intelligence (AI) stocks on sale right now. Two that I'm most excited about are Nvidia(NASDAQ: NVDA) and Microsoft(NASDAQ: MSFT). These two recently were down 16% and 29%, respectively, from their all-time highs, yet have a ton of momentum and could easily return them to new highs before 2026 is over.
The future is bright for each of these leaders, and it makes sense to load up on shares before the market cycles back to valuing them highly again.
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Microsoft
Microsoft is an established company that's implementing its AI strategy, and so far, it appears to be working.
Copilot, its AI assistant tool for its suite of business productivity software, is a hit and part of an AI business that is generating $37 billion in annual recurring revenue, growing at a 123% year-over-year pace. Its cloud platform, Azure, is also crushing it with 40% growth, mostly thanks to being a great place to build AI applications.
Overall, Microsoft's revenue rose 18% in its latest quarter, with diluted earnings per share (EPS) rising 23% year over year. Those are solid results, and easily are better than your average stock in the S&P 500 (SNPINDEX: ^GSPC). However, that's not how the market is valuing the stock. The S&P 500 trades for about 21.7 times forward earnings. Microsoft trades for just 20.
MSFT PE Ratio (Forward) data by YCharts
After spending the better part of three years trading at 30 times forward earnings, this is certainly a cheap price to pay for a company that's still doing quite well. While I'm unsure if Microsoft can rise and reclaim its 30 times forward earnings price tag, I think rising to around 25 times forward earnings is feasible, as this is a level where many of Microsoft's big tech peers trade around.
If Microsoft can report a solid quarter in a few weeks, I'm confident the stock can rise quickly and regain some of the ground it has lost. As a result, Microsoft is a bit of a time-sensitive investment as this deal won't last forever.
Nvidia
Nvidia is nearly in the same boat as Microsoft. While it trades for about the same price tag as the S&P 500, 21.9 times forward earnings, it trades for a mere 15.4 times next year's earnings.
NVDA PE Ratio (Forward) data by YCharts
What does that mean? Well, if Nvidia's stock price were to stay flat from now until the end of its next fiscal year (FY 2028, ending January 2028), Nvidia's stock would trade for 15.4 times trailing earnings -- a very cheap stock price that indicates a downturn could be coming. However, that's not the case.
The AI hyperscalers are on a multi-year track to build out AI computing power around the globe, and with next year's spending expected to exceed $1 trillion, Nvidia and its GPU ecosystem are set to capitalize on massive spending. Wall Street analysts project 82% growth for FY 2027 (ending January 2027) and 41% growth for FY 2028, showcasing that there is still a ton of growth left in the tank for Nvidia.
Furthermore, Wall Street has consistently underprojected Nvidia's growth rates over the past few years, and it may do so again next year, potentially leading to even more upside.
Historically, Nvidia's stock has rallied throughout the second half of the year as the market realizes that there is more AI spending going to happen in the next year. As projections roll out regarding next year's capital expenditures, I'd expect Nvidia's stock to soar on the news, leading to major gains for shareholders. As a result, the time is now to buy the stock, as it could skyrocket by the end of 2026.
Should you buy stock in Microsoft right now?
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Keithen Drury has positions in Microsoft and Nvidia. The Motley Fool has positions in and recommends Microsoft and Nvidia. The Motley Fool has a disclosure policy.
