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The "Magnificent Seven" stocks have dominated headlines since the artificial intelligence (AI) frenzy began. The list includes major U.S. technology companies Amazon (AMZN), Microsoft (MSFT), Apple (AAPL), Tesla (TSLA), Meta Platforms (META) (formerly Facebook), Google's parent company Alphabet (GOOGL), and Nvidia (NVDA).
Microsoft and Alphabet are among the world's most well-known and influential technology companies. With the incorporation of AI into their products, both are experiencing explosive growth and may continue to thrive for years to come. While it's difficult to say which of these two is the “best,” let's see how they both performed in their most recent quarters.
The Case For Microsoft
Microsoft Corporation (MSFT) has consistently evolved and expanded its product offerings to dominate the technology industry. Microsoft stock has long been regarded as a solid investment choice due to the company's strong financial performance, strategic acquisitions, and ongoing innovation. Over the last decade, MSFT stock has returned an eye-catching 879.8%.
Valued at $3.14 trillion, MSFT stock has gained 11.3% YTD, compared to the Nasdaq Composite's ($NASX) gain of 17.2%.
Microsoft gained an early-mover advantage in AI after investing in OpenAI in 2019. The company extended this partnership in 2023 and integrated AI into its flagship products.
While its strong financial performance can be attributed to its diverse product portfolio, the cloud has been a driving force for Microsoft.
The global computing market is expanding at a rapid speed. Azure is one of the leading cloud platforms globally, competing with Amazon’s AWS (Amazon Web Services) and Alphabet’s Google Cloud.
In the fourth quarter of fiscal 2024, Microsoft Cloud revenue increased by 21% to $36.8 billion. All three segments showed double-digit growth. The Intelligent Cloud segment grew 19% year on year and accounted for 44% of total revenue of $64.7 billion in the quarter. Management stated that Azure AI now serves over 60,000 customers.
Similarly, the Productivity and Business Processes segment (which includes Dynamics 365, Office products, Microsoft 365, LinkedIn, and others) reported an 11% revenue increase. The More Personal Computing segment, which includes Windows commercial products and Xbox, increased 14% during the quarter. Adjusted earnings rose 10% year on year to $22 billion.
Revenue increased by 16% in fiscal year 2024, while earnings rose by 22%. The company's cash, cash equivalents, and short-term investments totaled $75.5 billion, while its long-term debt turned out to be $42.6 billion. It also distributed $8.4 billion in dividends.
Currently, MSFT stock is trading at a premium, at 32.5x forward fiscal 2025 earnings and 11.2x forward sales.
Here's what analysts forecast for Microsoft’s financial performance over the next two years:
• In fiscal 2025, revenue is expected to increase by 13.7%, and earnings by 10.3%.
• In fiscal 2026, revenue is expected to increase by 14.9%, and earnings by 18.1%.
What Does Wall Street Say About Microsoft?
Overall, Wall Street rates Microsoft's stock as a “ strong buy.” Out of the 38 analysts covering MSFT, 34 rate it a “strong buy,” three recommend the stock as a “moderate buy,” and one suggests it is a “hold.”
The average price target stands at $501, which implies about 20% potential upside from current levels. Furthermore, the Street-high target price is $600, which indicates an upside of 43.4% over the next 12 months.
The Case For Alphabet
Alphabet (GOOGL) is the parent company of Google. The company, like Microsoft, has maintained a stronghold on the tech industry through its legacy portfolio. GOOGL stock has increased significantly in value, thanks to the company's dominance in search and advertising, as well as its strategic diversification.
Valued at $2.1 trillion, GOOGL stock is up 22.8% YTD, outpacing the tech-heavy Nasdaq Composite.
Google Search is the world's most popular search engine, with a market share of roughly 91.06%. Other search engines, including Microsoft's Bing, have failed to challenge Search's dominance.
Google Search revenue increased 13.8% year on year to $48.5 billion in the second quarter of 2024. It accounted for 65% of total revenue.
Google Cloud is also the company's fastest-growing segment, competing with AWS and Azure. It increased by 28.7% in the second quarter to $10.3 billion. Furthermore, advertising generates a significant portion of total revenue. While the advertising market struggled in 2022, there have been signs of improvement since last year. Alphabet's ad sales totaled $64.6 billion, up 11.1% year on year.
According to BCC Research, Alphabet is the dominant player in digital advertising. It could continue to thrive in this market, which is expected to be worth $1.3 trillion by 2027, thanks to AI. While AI has long been present in Google products, ranging from Gmail to Google Maps, the company has struggled to compete with Microsoft and OpenAI in the AI race.
However, given Alphabet's strong financial position and the abundance of resources at its disposal, the company is more than capable of raising the stakes. It ended the second quarter with $110.9 billion in cash, cash equivalents, and marketable securities, with long-term debt of $13.2 billion. The company also generated $13.4 billion in free cash flow during the quarter.
Currently, GOOGL stock is trading at 22.2x forward 2024 estimated earnings and 6.04x forward sales.
Here's what analysts forecast for Alphabet’s financials over the next two years:
• In 2024, revenue is expected to increase by 12.9%, and earnings by 31.9%.
• In 2025, revenue is expected to increase by 11.1%, and earnings by 13.8%.
What Does Wall Street Say About Alphabet?
Overall, Wall Street rates GOOGL stock a “strong buy.” Out of the 44 analysts covering GOOGL, 34 rate it a “strong buy,” three recommend the stock as a “moderate buy,” and seven suggest it is a “hold.”
The average price target stands at $204.47, which implies about 19.2% potential upside from current levels. Furthermore, the Street-high target price is $240, which indicates an upside of 40% in the next 12 months.
Which Magnificent 7 Stock is The Better Buy?
Microsoft's strong financial performance, strategic acquisitions, ongoing innovation, and dedication to shareholder returns make it a dependable and appealing investment opportunity. Similarly, Alphabet's dominant market position in search, diverse revenue streams, and brand value make it a safe bet for investors seeking growth and stability.
Both companies have proven their worth and have a bright future ahead of them. Both, in my opinion, are excellent long-term investments. However, if I had to choose one, I would go with Alphabet because it is a reasonable buy right now.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
