NVIDIA and Microsoft both aim for a 4 trillion market cap: one "sells shovels," the other "finds gold"

Driven by the artificial intelligence revolution, Microsoft and NVIDIA are both racing towards a peak market value of $4 trillion, likely forming the top club in the stock market.

However, despite having the same goal, the AI investment logic represented by the two giants is fundamentally different—one is a direct bet on core infrastructure, while the other is a long-term belief in the proliferation of application ecosystems.

NVIDIA's soaring value stems from its unique position in the AI value chain. As the "arms dealer" of the AI "arms race," any company looking to enter the AI field must first procure its chips, which makes NVIDIA's growth story simple and direct.

In contrast, Microsoft's path is more complex, and the returns from its AI business appear more "ambiguous." As a massive enterprise with annual revenues far exceeding those of NVIDIA, Microsoft's success ultimately depends on whether enough businesses and consumers are willing to pay a premium for its AI-enhanced services.

For Microsoft, the company saw its market value increase by $1 trillion in less than three months, but after reaching a $4 trillion valuation, its stock price will set a record for the highest expected earnings multiple in over 20 years. This means the market can hardly afford any missteps in its future performance.

Seller of Shovels vs. Service Provider

The positions of NVIDIA and Microsoft in the AI value chain determine fundamental differences in their business models and risk exposures.

NVIDIA is a typical "seller of shovels," as any company looking to mine the AI gold mine cannot do without its high-end chips. This model has led to explosive growth, with annual sales skyrocketing more than tenfold in the past three years.

On the other hand, Microsoft plays the role of a "service provider." Its bet is on deeply integrating AI technology into its vast product matrix (such as Azure cloud services, Office software, etc.) and convincing users to pay for it. To achieve this goal, AI must become a disruptive tool that fundamentally changes business operations and daily life, much like the Windows operating system or Word software did decades ago. Many believe it is just a matter of time, but "when" this will happen is crucial for supporting Microsoft's current high valuation.

Microsoft's Woes: Internal Challenges Under High Valuation

Despite the promising outlook, the challenges Microsoft faces recently cannot be ignored, adding uncertainty to its soaring stock price. First, the relationship with early partner OpenAI has shown signs of strain. Reports suggest that OpenAI wishes to transition into a standard for-profit company, which could lead to a restructuring of its relationship with Microsoft, which is both a funder and a competitor. More concerning for Microsoft is that OpenAI has the right to restrict Microsoft's access to its future technologies once it reaches the vague threshold of "general artificial intelligence" (AGI), which could undermine a key part of Microsoft's AI strategy.

Secondly, Microsoft has also encountered setbacks in its efforts to reduce dependence on NVIDIA. It is reported that the company has faced difficulties in developing its own AI chips. Meanwhile, a large-scale restructuring is underway within the company. After laying off 6,000 employees in May, Microsoft confirmed plans to lay off another 9,000 on Wednesday Despite layoffs aimed at improving efficiency and increasing investment in AI, Microsoft still has a long way to go. According to S&P Global Market Intelligence, Microsoft's revenue per employee is among the lowest among large tech peers (only higher than Amazon). To reach the efficiency level of Google's parent company Alphabet, Microsoft would need to cut nearly 84,000 positions.

Timing is Key: Transformative Technologies Require Patience

From a financial perspective, AI's current contribution to Microsoft remains limited. According to consensus estimates from Visible Alpha, AI services within Microsoft's Azure cloud division generated approximately $11.5 billion in revenue in its recently concluded fiscal year. Although this figure is more than double that of the previous year, it still accounts for only about 4% of the company's total sales. This limited contribution provides Microsoft with some downside protection—if AI business growth falls short of expectations, the overall impact on the company remains relatively manageable.

In contrast, NVIDIA faces a more "binary" issue. Analysts expect its annual growth rate to remain at 32% over the next three years. However, if the AI demand from its largest customers fails to materialize, or if disruptive technologies render its chips less critical, this growth could quickly evaporate.

Looking ahead, the capital expenditure plans announced by NVIDIA's largest customers indicate that demand for its chips is unlikely to weaken in the short term. However, Microsoft still needs to wait for AI to truly become a ubiquitous disruptive tool.

As Federal Reserve Chairman Jerome Powell pointed out in his congressional testimony last week, the implementation of disruptive technologies that change the economy often takes longer than people expect. For Microsoft, which has reached peak scale and valuation, timing will be everything. The giant behind Windows and Office has the financial resources and influence to drive this process, but whether it can achieve this quickly enough to justify its soaring valuation remains an unknown