A strong case could be made for Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) as the most magnificent of the “Magnificent Seven” companies. The towering AI giants are relatively cheap (and smooth) ways to play the rise of AI.
Undoubtedly, the two firms don’t just stand to benefit downstream; they’re building their own silicon to capitalize on the opportunity further upstream. Given this, I’m inclined to be bullish on shares of both companies for the year ahead.
GOOGL, MSFT: Poised for a Smoother Ride as Markets Waters Get Rough
Perhaps what makes Alphabet and Microsoft outshine their Magnificent Seven rivals is that they are less cyclical than some of their peers. This could make them less vulnerable to the tech sector’s next inevitable downturn.
As we witnessed last Thursday, shares of AI blue chips can have bad days, putting them off well over 2%-3% in a single day. Though broad-based strength propelled the markets higher the next day, seeing another group of stocks lead the rally for a change as the Magnificent Seven companies shifted to the passenger seat was interesting.
Shares of GOOG and MSFT weren’t as hard-hit as those of Nvidia (NASDAQ:NVDA) or Tesla (NASDAQ:TSLA), two of the more cyclical members of the Magnificent Seven group. With shockingly high betas of 1.68 and 2.31, respectively, GOOG and MSFT sport betas of 1.05 and 0.89, respectively, making them a smooth ride compared to NVDA and TSLA. A higher beta means that shares will receive an even bigger hit to the chin when the market does.
Now, back to Alphabet and Microsoft. As AI stays in the driver’s seat, the two companies will see more business overlap. Whether we’re talking about Google Search versus Bing, Google Cloud against Microsoft Azure, or Gemini and MAI-1 (Microsoft’s AI model in the works), the AI era is putting the two titans toe to toe. But which tech giant is the better bet right now? Let’s find out with some help from TipRanks’ Comparison Tool.
Alphabet
Alphabet is a relative bargain in the Magnificent Seven, and it continues to be despite its price-to-earnings (P/E) ratio of 28.5. Historically, Alphabet stock is pricy, but comparatively, the stock remains a steal. Of course, Google Search is less dominant than Microsoft Bing, with ChatGPT tech tacked on. However, the AI era isn’t just about search, even though that’s the business paying the bills for the Silicon Valley titan.
Just as Microsoft and Perplexity AI can leverage AI to break into the search business, Alphabet can use it to gain ground in the mobile market, where it struggled to take off. Recently, the company brought its Gemini AI app to the latest Z series Samsung smartphones. The closer integration with new Samsung devices may help both firms compete more effectively against Apple (NASDAQ:AAPL) and its new Apple Intelligence.
Additionally, there’s a Bloomberg report that Gemini will also be coming to the iPhone later this year. Indeed, teaming up with Apple and Samsung would give Gemini an AI edge (pardon the pun), which Microsoft will struggle to keep up with.
Even if Alphabet feels some pressure from Microsoft in the cloud and search, perhaps the mobile market potential is enough to offset it.
What’s the Price Target on GOOGL Stock?
According to analysts, GOOGL stock is a Strong Buy, with 32 Buys and six Holds assigned in the past three months. The average GOOGL stock price target of $199.83 implies an 8.0% upside potential.
Microsoft
Microsoft stock is a much pricier bet than Alphabet, with shares going for 39.3 times trailing P/E. At over $450 per share, MSFT stock happens to be the most expensive it’s been in recent memory. The big question is how much more multiple expansion the $3.4 trillion can command before expectations become too high. As Microsoft reduces its dependence on ChatGPT and OpenAI, perhaps Microsoft stock may deserve an even higher multiple.
With Microsoft giving up its OpenAI board observer seat, a move that could be to the liking of regulators, questions linger about how the firm’s AI strategy will be impacted. Undoubtedly, Microsoft Copilot depends in large part on the magic going on at OpenAI. I view the recent move to surrender a board seat at OpenAI as a sign of confidence. Perhaps Microsoft can grow under the power of its own in-house AI and chip prowess.
The company’s working hard on MAI-1, an AI model that doesn’t just put the “large” in large language model (LLM), with its estimated 500 billion parameters. On the lite end, Microsoft’s Phi (3.8 billion parameters) also looks like an intriguing Microsoft-made model that could give Copilot + PCs a unique edge in the future iteration of Windows.
Overall, I think Microsoft is well on its way to walking down its own AI path. Though I have no idea (nobody does right now) if MAI-1 and Phi will outdo ChatGPT’s comparable models, I do see them as potentially better tailored for the Windows and Azure ecosystem. That alone could be a huge win for the firm.
What’s the Price Target on MSFT Stock?
According to analysts, MSFT stock is a Strong Buy, with 33 Buys and one hold assigned in the past three months. The average MSFT stock price target of $502.56 implies 10.8% upside potential.
Conclusion
You can’t go wrong with Google or Microsoft at current levels. They’re a less cyclical way to bet on the AI powers of the Magnificent Seven.
Though the two giants will be competing directly in AI, the cloud, and search, each firm has unique strengths that could help it dominate the AI world of tomorrow. If I had to pick one, I’d go with Alphabet. It’s the cheaper stock and may have more room to grow as the “mobile AI” chapter unfolds in the coming year. That said, I am bullish over Microsoft’s falling dependence on OpenAI as the firm looks to unleash its own ambitious models.
