Should You Buy These 2 ‘Magnificent Seven’ Stocks Ahead of Earnings? Microsoft and Alphabet in Focus

The stock markets have been rising in these last few days of January. In fact, they’ve been reaching record high levels, with the S&P 500 closing out Monday’s session at almost 4,928.

The index’s surge to this new record has been powered by the so-called ‘Magnificent 7’ stocks, the mega-cap tech firms that, by virtue of their sheer size, dominate the S&P 500 index.

A large part of the tech gains have come on the crest of the AI surge. Ever since the Microsoft-backed OpenAI released the generative AI chatbot ChatGPT in November of 2022, AI technology has been at the front of everyone’s mind. New companies are springing up to take advantage of AI opportunities, and the tech giants have been integrating AI into their existing product lines. Investors have taken note – and the bulls are running.

So, let’s take a look at two of the Mag 7s. Microsoft and Alphabet will be reporting earnings today after the closing bell, and those earnings are highly anticipated. A snapshot of Wall Street’s perspective should give us an idea of whether investors should consider buying them. Let’s delve into the TipRanks database for extra color and take a closer look.

Microsoft Corporation (MSFT)

First up is Microsoft, currently the world’s largest publicly traded firm with a market cap of $3 trillion. Microsoft isn’t just a giant company, however; it is also one of the most recognizable brands on the planet. Founded by Bill Gates back in the early days of the personal computer revolution, the company quickly became a leader in both personal computer and computer software, making Mr. Gates one of the world’s richest people in the process. There are few aspects of the computing industry that Microsoft has not touched.

Microsoft will always be linked with the Windows operating system, which has come to dominate its niche, and the company’s Office software package is almost as ubiquitous. In recent years, Microsoft has been making strong moves into AI, as well, and has been integrating AI tech into several of its other products.

AI is the shiny new thing in the world of software, grabbing that crown right from the head of cloud computing. Microsoft has been working to fuse the two together, integrating AI into its Azure cloud platform. Azure contains over 200 products and services that subscribers can choose from. Adding generative AI into the mix helps users create more adaptable and flexible apps, including smarter iterations of machine translations, document processing, and conversational AI bots.

The new tech is also central to Microsoft’s Copilot launch. Copilot is an AI system, created as an online user assistance app that will help optimize Microsoft’s existing software products. Users can activate the Copilot and interact with it during work sessions, to explore software capabilities and functions. Think of it as a user manual in chatbot form. The company is making a big push to publicize Copilot, and will be adding a Copilot button to the Windows PC keyboard – marking the first change in decades to the venerable keyboard hardware.

Microsoft last released earnings for Q1 of fiscal year 2024. In that report, the company showed a top line of $56.5 billion, beating the forecast by $1.95 billion and growing nearly 13% year-over-year. The bottom line was reported as EPS of $2.99, or 34 cents per share better than had been anticipated. The company’s fiscal Q1 gains were driven by a 19% y/y increase in Intelligent Cloud services, which includes the Azure cloud platform; this segment’s revenue came to $24.3 billion of the total.

Looking ahead to the Street’s expectations for Microsoft’s fiscal Q2 earnings, revenue is predicted to come in at $61.13 billion, and EPS at $2.77.

Turning to the analysts, we’ll check in with Wedbush’s well-known tech expert, Daniel Ives. Ives sees AI as the key point to Microsoft’s continued success, and writes, “Our checks for Microsoft have been robust this quarter as we believe the AI tidal wave with Redmond in the driver’s seat is accelerating cloud deal flow for Azure with strong momentum into the rest of 2024. We would expect a solid beat for the December quarter with Nadella & Co. likely exceeding the Street’s top-line revenue of $61 billion and EPS of $2.77. The most important metric will be Azure growth with the Street’s bogey of 27% a very beatable number in our view given the level of activity we witnessed during the quarter from core MSFT enterprise customers heading to the cloud.”

The 5-star analyst goes on to give an upbeat outlook for Microsoft in the near future: “While AI use cases will build markedly in FY24 its clear FY25 for Redmond remains the true inflection year of AI growth with pricing, beta customers, and use cases all being rolled out over the next 3-6 months. We believe the stock still has yet to price in what we view as the next wave of cloud and AI growth coming to the Redmond story with FY24 with a strong competitive cloud edge vs. Amazon and Google.”

Ives complements his stance with an Outperform (Buy) rating, and his $450 price target implies a moderate one-year gain for the stock of 10%. (To watch Ives’ track record, click here.)

This tech giant has picked up 31 recent analyst reviews, and they are unanimously positive for a Strong Buy consensus rating on the shares. MSFT is selling for $409.72; the stock’s average price target of $443.20 suggests that it will gain 8% in the next 12 months. (See Microsoft’s stock forecast.)

Alphabet, Inc. (GOOGL)

Now we get to Alphabet, the parent company of Google. This automatically gives Alphabet a prominent position in the tech world, as Google is the leader in the global search engine market. Alphabet’s other subsidiaries include YouTube, the world’s largest online video search and playback engine, as well as the autonomous vehicle company Waymo, the drone-based small air freight delivery platform Wing, and the AI venture Deep Mind. Alphabet’s AI work also includes Bard, a generative AI chatbot.

As for size, Alphabet’s $1.91 trillion market cap makes it the third largest of the world’s publicly traded firms. Alphabet has reached the top of the pyramid by leveraging its dominant position in the online search and ad segments. The company’s primary revenue generator is the Google subsidiary.

To maintain its dominance, the company has been adding AI technology to Google’s search engine as a way of improving search results and creating better targeted ads. These are intertwined initiatives; the first is designed to keep the Google search engine at the top of the heap, while the second is designed to keep advertisers tied to Google’s ad services. In addition, the company’s Shorts, the short-form videos available on YouTube, are growing in popularity and present new fields for monetization.

Monetization is the key, of course, for continued success. Alphabet generated $76.8 billion in revenue during 3Q23, beating expectations by $980 million and registering 11% year-over-year top line growth. The Google Search contribution to that total revenue was $44 billion, more than 57% of the total.

At the bottom line, Alphabet reported Q3 earnings of $1.55 per share. This was up from the $1.06 reported in the prior-year period, and was 10 cents per share ahead of the forecast. It was also the third consecutive quarter of sequential earnings growth.

For the December quarter, the Street expects to see continued gains. Revenues are expected to come in at $85.27 billion, and to support an EPS of $1.60.

All of that makes the background to Bank of America analyst Justin Post’s upbeat take on Alphabet. Post, who is rated in the top 0.5% out of more than 8,600 Wall Street stock analysts, writes of GOOGL shares, “We believe in 2024, continued recovery in the ad sector, ramping Shorts monetization, AI integrations boosting ROI (& ad spend) and strong cost management can drive upside to Street estimates. Key theme for 2024 is Google’s AI progress, and we expect a lot with Gemini and SGE (search generative experiences)… We believe that Alphabet should trade at a premium to a media peer group given technology leadership, high margins, and cash flow for buybacks.”

Putting this into simple, quantifiable terms, Post rates GOOGL as a Buy, and his $175 price target suggests the shares will appreciate by 14% this year. (To watch Post’s track record, click here.)

The 21 recent analyst reviews on Alphabet break down to 16 Buys and 5 Holds, for a Strong Buy consensus rating. Shares are currently priced at $153.51 and have an average price target of $159.83, a combination that indicates room for a modest 4% upside in the year ahead. (See Alphabet’s stock forecast.)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.