Investor Dan Niles' favorite picks for the rest of earnings season

Investor Dan Niles identified Microsoft and Nvidia as his preferred stock picks for the ongoing earnings season. He is bullish on Microsoft, whose shares have surged about 22% this year, citing the reacceleration of its Azure cloud growth, which saw a 2% faster increase in the March quarter following its partnership with OpenAI, though he notes high expectations for its upcoming earnings. Niles also favors Nvidia, becoming particularly bullish after the reversal of a China export ban allowing sales of its H20 chip, and anticipates continued strong capital expenditure driven by sustainable AI inference demand.

Analysis

Dan Niles of Niles Investment Management has identified Microsoft and Nvidia as key investment opportunities, citing specific artificial intelligence catalysts for both. The investment thesis for Microsoft centers on the reacceleration of its Azure cloud platform. After three consecutive quarters of disappointing performance, Azure's growth accelerated by 2% in the March quarter relative to the December quarter, a turnaround attributed to the strategic partnership with OpenAI, including the Stargate AI supercomputer project. This fundamental improvement has supported a 22% year-to-date surge in Microsoft's stock, contrasting with its 12% gain in the previous year when it underperformed the S&P 500's 23% rise. However, there is a note of caution, as widespread positive expectations for its upcoming earnings report may have elevated the performance bar. For Nvidia, the bullish outlook is supported by two primary factors: the resumption of chip sales to China and a strategic shift in AI-driven demand. The recent reversal of a U.S. ban allows Nvidia to sell its H20 chip to China, reintroducing a significant revenue source that had been excluded from financial models following an earlier inventory write-off. Furthermore, Niles highlights that capital expenditure is now increasingly driven by AI inference, which he views as a more sustainable long-term demand driver than the initial training phase of AI models.

Key Decisions for Investors

• Investors in Microsoft should weigh the positive fundamental driver of reaccelerating Azure growth against the significant risk of elevated market expectations ahead of its upcoming earnings report.
• For Nvidia, the resumption of H20 chip sales to China and the secular shift towards more sustainable, inference-driven AI demand represent two key potential catalysts for future growth.
• Given the themes of AI innovation and U.S.-China trade policy, it is prudent to monitor both the competitive landscape in AI and any changes to export controls, as these could materially impact the outlook for both companies.