Nvidia (NVDA +1.91%) briefly became the first company to cross a $5 trillion market cap just a couple of months ago, driven by the company's remarkable revenue and earnings growth on account of its dominance of the artificial intelligence (AI) chip market.
However, the share price of the chip giant has pulled back since then, even though it continues to maintain terrific growth despite its massive size. Concerns about the AI boom becoming a bubble and the sustainability of the heavy infrastructure spending that has driven Nvidia's phenomenal growth over the past three years have begun to weigh on the stock.
But there's another company -- Microsoft (MSFT +1.66%) -- that's making the most of the proliferation of AI. One analyst believes that this "Magnificent Seven" company could hit a $5 trillion market cap in 2026. Let's take a closer look at Microsoft's prospects and why it could hit the $5 trillion market cap milestone in the new year.
Image source: Getty Images.
AI is set to accelerate Microsoft's growth
There is no denying that Nvidia's chips have played a crucial role in the widespread adoption of AI technology. However, the computing power provided by its chips is eventually harnessed to create customer-facing solutions. For example, training OpenAI's ChatGPT wouldn't have been possible without Nvidia's chips, but the chatbot became popular because of what it was doing for users.
From helping users write emails to creating images to drafting documents and writing code, ChatGPT's versatility and productivity have been the key reasons behind its raging success. Not surprisingly, ChatGPT parent OpenAI points out that it now has more than 1 million paying enterprise customers, while more than 800 million users use ChatGPT every week.
Microsoft made a smart move in 2019 by investing in OpenAI. It still holds a 27% stake in OpenAI, a company reportedly worth $500 billion. However, more than the financial aspect, OpenAI provided Microsoft with access to large language models (LLMs) and applications, enabling it to build a wide portfolio of AI-powered tools and deploy them across its offerings.
From cloud computing to personal computing to productivity tools, Microsoft has infused AI across all of its business segments. The good part is that its AI tools are gaining traction among customers. For example, Microsoft management remarked on the company's October earnings conference call that Copilot, its chat-based AI assistant, is now being used by 90% of the Fortune 500 companies.
Even better, Microsoft says that a "large majority of our enterprise customers continue to come back to purchase more seats." Even coders and cybersecurity specialists are using Microsoft's Copilot to enhance productivity and improve the effectiveness of their tools. So, it won't be surprising to see Microsoft cornering a bigger share of the office productivity tools market in the long run, as compared to its current share of 30%.
On the other hand, the demand for Microsoft's Azure cloud infrastructure is outpacing supply. This explains why Microsoft intends to double its data center capacity over the next couple of years to support the rapidly growing demand from customers looking to build AI tools on its platform.
It is worth noting that Microsoft's commercial remaining performance obligations (RPO) stood at a massive $392 billion at the end of the previous quarter, up by 51% from the prior year. This metric refers to the total value of contracts yet to be fulfilled. The size of Microsoft's RPO is larger than the $294 billion revenue it recorded in the trailing 12 months. Additionally, its RPO grew at a faster pace than the 18% revenue jump Microsoft recorded last quarter, indicating that it is winning new business at a faster rate than it is fulfilling existing contracts.
As such, don't be surprised to see Microsoft's growth accelerating in 2026, putting the tech giant on track to attain a $5 trillion market cap.
NASDAQ: MSFT
Key Data Points
Here's how it can reach that milestone
Microsoft currently has a market cap of $3.6 trillion. So, it needs to appreciate by another 41% from current levels to reach the $5 trillion milestone. Analysts expect a 16% jump in Microsoft's revenue in the current fiscal year to $327 billion, followed by a 15% increase in the next one to $376 billion.
However, Microsoft's massive RPO and the pace of growth in this metric indicate that it could outpace those expectations. Assuming Microsoft's revenue grows by 20% in the next fiscal year to $392 billion (from this year's estimated revenue of $327 billion) and it trades at 13 times sales at that time, in line with its current price-to-sales ratio, its market cap will land at just over $5 trillion.
So, this AI stock seems poised to deliver healthy gains in the coming year, which is why investors may consider adding it to their buy list for the new year.
