Are Analysts Getting Too Bullish on Microsoft and Nvidia?

It was seven years ago that the market saw its first 1 trillion-dollar company, when Apple (AAPL 0.54%) crossed that threshold. Since then, many more have reached trillion-dollar valuations. And according to some analysts, it may not be long before there is a stock that’s worth $5 trillion.

Microsoft (MSFT 1.33%) and Nvidia (NVDA 1.81%) are among the most highly valued stocks in the world today. They are trading at record levels and their valuations aren’t exactly modest. And yet, analysts are projecting much more upside for these tech stocks. Are forecasts getting a bit too rosy for these tech giants, or can it still be a good time to invest in them?

The race to a $5 trillion valuation

Apple, Microsoft, and Nvidia are routinely among the most valuable companies in the world. Lately, however, Microsoft and Nvidia have been creating some space between Apple and are now firmly in the top two positions. As of July 7, Nvidia held the title as the most valuable company, with a market cap of nearly $3.9 trillion. At such a high valuation, it may only be a matter of time before it reaches the $4 trillion threshold.

For chipmaker Nvidia to get to $5 trillion, it would need to rise by a little less than 30% from where it is right now. Microsoft, the diversified software and hardware company, which has a market cap of $3.7 trillion, would need to rally by more than 35% to get there. Analysts at Wedbush believe that one of these two might reach a $5 trillion valuation within the next 18 months.

Price targets can vary, but according to the consensus average, Microsoft has an upside of around 6% while Nvidia is at approximately 11%. But over time, and assuming more analysts upgrade their price targets, that consensus average will rise.

Are these stocks already too expensive?

These companies are highly valued, but they’ve also been growing at impressive rates over the years. Here’s how the big three stack up against one another when looking at their respective price-to-earnings (P/E) multiples.

PE ratios data by YCharts

The average S&P 500 index stock trades at a P/E multiple of 24, which would mean that both of these stocks are trading at sizable premiums, in a market which is already looking red hot and hitting record levels. Another way to put this into context is to compare these valuations against the growth rates these companies have been achieving in recent quarters.

Growth rates data by YCharts

If a company is growing at a fast rate, then it can be justifiable to pay a high premium, especially if expectations remain high. Nvidia is much more expensive than Microsoft with respect to earnings, and its growth rate is far higher as well, due to its dominance in the artificial intelligence chip market.

The danger, however, is that a potential slowdown due in tech spending due to tariffs and trade wars could undermine the growth prospects of these companies and make them worse buys in the process.

Is it too late to invest in Nvidia or Microsoft?

Nvidia and Microsoft are highly profitable and strong businesses to invest in. However, the problem with expecting either one of them to hit a $5 trillion valuation in the near future is that a best-case scenario would need to exist for tech, and AI spending would need to remain strong. I’m not convinced that will happen if the economy slows down, and that’s why I think that expectations may be getting a bit too high for these tech stocks right now; there is too much optimism priced in, as they already look expensive today.

But if you’re planning to invest for at least five years, then either one of these stocks can still be a good investment to hold in your portfolio. They are among the safest investments to own. And while they may experience volatility in the short term, over the long term, they are still likely to rise significantly in value.