Stocks in the artificial intelligence sector have faced setbacks as recession concerns, spurred by tariffs enacted during the Trump administration, have resurfaced. This situation is particularly affecting the “Magnificent Seven” group, with all the stocks in this cohort declining this year, many by over 10%.
Nevertheless, some analysts on Wall Street believe that shares of Nvidia (NVDA -0.75%) and Microsoft (MSFT 1.07%) are currently undervalued, as outlined below:
- Vivek Arya from Bank of America has set a target price of $200 per share for Nvidia over the next 12 months, suggesting a 69% potential increase from its current price of $118, leading to a market capitalization of $4.8 trillion.
- Brent Thill at Jefferies projects a target price of $550 per share for Microsoft in the next year, indicating a 42% upside from its current stock price of $386 and implying a market value of $4.1 trillion.
Here’s what investors should keep in mind regarding these AI stocks.
Nvidia: 69% Potential Upside
Nvidia’s graphics processing units (GPUs) drive nearly all advanced artificial intelligence systems. According to Forrester Research, “Nvidia sets the pace for AI infrastructure globally. Modern AI wouldn’t be possible without Nvidia’s GPUs.” The company’s strength lies in its ability to produce complementary hardware such as CPUs and networking systems, effectively enabling the creation of entire AI data centers.
Currently, Nvidia’s stock is 21% below its peak due to investor concerns surrounding two major challenges. First, it has been reported that DeepSeek trained an advanced reasoning model with fewer GPUs than U.S. firms like OpenAI, leading to a sell-off in Nvidia’s stock. However, CEO Jensen Huang believes the market misunderstood this situation, asserting that cost efficiencies will increase demand for AI hardware by making it accessible to more companies.
Second, recent U.S. export regulations have restricted Nvidia’s ability to sell its top-tier chips to Chinese and Russian markets, reducing revenue from China significantly, from 21% in fiscal 2023 to an estimated 13% in fiscal 2025. This percentage could shrink further due to potential additional regulations.
Despite these risks, Nvidia is also anticipating positive developments. The company just launched Blackwell GPUs, which Huang claims will be its “most successful product” ever. Furthermore, Nvidia has developed comprehensive computing solutions for autonomous vehicles and robotics, encompassing data center hardware, software development tools, and on-device systems.
Microsoft: 42% Potential Upside
As the largest enterprise software provider and the second largest public cloud platform, Microsoft occupies a central position in two rapidly expanding markets. Sales in enterprise software are anticipated to grow at 12% annually through 2030, while cloud computing revenue is forecasted to increase by 21% per year during the same timeframe, suggesting that Microsoft has a solid opportunity for double-digit earnings growth through the end of the decade.
Microsoft is embedding artificial intelligence into its products across both segments to capture market share; however, investor sentiment has been lukewarm, with the stock down 17% from its July peak. Concerns have also emerged about whether the company is overspending on AI, particularly in terms of investing in data center infrastructure and OpenAI.
While it’s acknowledged that large language models may become commoditized, leading to interchangeability, this scenario positions Microsoft well. Cost efficiencies achieved by firms like DeepSeek could drive increased demand for AI cloud services. A recent survey by Morgan Stanley indicated that Microsoft Azure is the public cloud most anticipated to gain market share in the coming three years.
Despite market disappointment regarding Microsoft’s fiscal second-quarter financial results, CEO Satya Nadella announced positive news: the AI segment has surpassed a revenue run rate of $13 billion, representing a 175% year-over-year increase.
Wall Street anticipates a 13% annual growth in Microsoft’s earnings through fiscal 2026, which concludes in July 2026. This positions its current valuation at 31 times earnings as relatively fair. However, with Microsoft having consistently exceeded consensus earnings estimates by an average of 5% over the past six quarters, the current valuation may seem reasonable in hindsight. Personally, while skeptical about a rapid 42% return in the coming year, I believe that long-term investors should contemplate acquiring shares of Microsoft now.
Bank of America is an advertising partner of Motley Fool Money. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Bank of America, Jefferies Financial Group, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
