I still like Nvidia, but right now, I like this legendary S&P 500 stock more

Nvidia is one of my favourite stocks. However, I haven’t added to my holding in the recent market sell-off.

I have been buying shares in another S&P 500 company though. This stock is down about 27% from its highs and at current levels, I see it as a bit of a no brainer for my retirement portfolio.

A long-term winner

The company I’m referring to is Microsoft (NASDAQ: MSFT). One of the largest tech companies in the world, it’s a leader in business productivity solutions, cloud computing, artificial intelligence (it owns a large chunk of ChatGPT owner OpenAI), and video gaming.

Not so long ago, this stock was trading for $550 and analysts were targeting a share price of $600 or higher. Today however, it can be snapped up for around $400 (I actually managed to pick up some shares near $385).

At current levels, I see a lot of appeal. In terms of the valuation, the stock’s price-to-earnings (P/E) ratio using the earnings forecast for the financial year starting in July is only 22.

In my view, there’s a lot of value on offer at that earnings multiple. Because this company is a proven long-term winner.

An exceptional business

Despite being a very large company (market cap of around $3trn today), Microsoft is growing at a very impressive rate. Over the last five years, revenue has climbed from $143bn to $282bn (an annualised growth rate of about 15%).

Looking ahead, analysts expect revenue of $328bn (+16%) this financial year. The following year, they expect $379bn (also +16%).

Fuelling this growth is the company’s cloud computing division. Last quarter, this grew 26% year on year.

Note that this segment has plenty of growth potential from here. According to Grand View Research, the global cloud computing market is expected to grow by around 20% per year between 2025 and 2030.

Another thing to like is the company’s high level of profitability. Over the last five years, return on capital employed (ROCE) has averaged 29%, which is fantastic.

Additionally, it has a rock solid balance sheet, pays dividends (and has a great dividend growth track record), and is doing share buybacks. Overall, there’s a lot to like.

I should also point out that over the long term, this stock has really delivered for investors. Over the last 10 years, it has generated a share price return of around 22% per year (and that’s after the recent 27% fall).

An investment opportunity?

Of course, it’s not perfect. One issue to be aware of is that the company is spending a ton of money on AI infrastructure at the moment — around $120bn this year — in an effort to be a leader in this area of technology. The problem is that there’s no guarantee this investment will pay off.

Another issue is that as a software company, it’s being dragged into the ‘AI is going to kill software’ narrative. I’d be very surprised if AI did kill this business given how embedded its products are in the corporate world and its part ownership of OpenAI, but this could impact sentiment towards the stock for a while.

Overall though, I think the risk/reward proposition is compelling at current levels. I believe the shares are worthy of further research.

The post I still like Nvidia, but right now, I like this legendary S&P 500 stock more appeared first on The Motley Fool UK.

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• Is the stock market in an AI bubble?
• The 2026 software apocalypse: 3 stocks down 25%+ to consider buying now, according to JP Morgan
• What I bought this week in my Stocks and Shares ISA

Edward Sheldon has positions in Nvidia and Microsoft. The Motley Fool UK has recommended Microsoft and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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