To The Moon

Both Microsoft and Alphabet are set to release their earnings reports on Tuesday, 23 July, and they’ve both shown impressive resilience and growth in 2024. However, there are nuanced differences that investors should consider before diving in.

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Year-to-Date Performance: A Head-to-Head Comparison

Since Q1, both $Microsoft(MSFT)$ and Alphabet have demonstrated impressive performances. Microsoft's share price has climbed approximately 36% year-to-date, and Alphabet has matched this growth with a similar 36% increase. This parallel performance underscores robust investor confidence, particularly in their AI initiatives.

MSFT vs GOOGL: 1-year performance

Financial Fortitude: Who's Winning the Numbers Game?

Microsoft's fiscal year 2024 third-quarter results were particularly strong, showcasing 17% revenue growth, 20% net income growth, and 20% diluted EPS growth. These figures highlight Microsoft's ability to maintain profitability while heavily investing in AI and cloud services. Intriguingly, Microsoft's recent integration of Cortana with Power BI suggests a future of seamless AI-powered data analysis.

Alphabet, on the other hand, is expected to report 27% EPS growth to $1.83 and a 13% revenue increase to $84.1 billion for Q2 2024. These projections suggest that $Alphabet(GOOGL)$ is managing to grow its bottom line effectively, despite increased competition in the AI space. Google’s exploration of AI music generation through AudioML hints at a potential revolution in creative content creation.

Quarterly EPS for MSFT and GOOGL

The Cloud Battle: Azure vs. Google Cloud

One key metric to watch is the companies' respective cloud businesses. Microsoft's well-established Azure platform has been a significant driver of its recent growth. In contrast, Google Cloud, while still the third-largest provider, has been gaining ground. The upcoming earnings reports will likely provide crucial insights into how these cloud services are faring in the increasingly AI-driven market.

Valuation Dynamics: Alphabet's Edge?

From a valuation perspective, $Alphabet(GOOGL)$ currently appears more attractive. It’s trading at a forward P/E of 23x, which is near the S&P 500's 20.9x and below its decade-long median of 26.1x. Microsoft, however, is trading at a higher forward P/E of 34.5x, above its historical median. This suggests that Alphabet may have more room for upward valuation adjustment.

Beyond valuation, both companies face potential antitrust scrutiny due to their dominant positions, and the evolving regulatory landscape around AI data privacy and bias could impact their development strategies.

Future Prospects: Riding the AI Wave

Looking ahead, both companies are well-positioned to capitalise on the AI boom. Microsoft's integration of AI into its suite of productivity tools and its partnership with OpenAI give it a strong foothold in both consumer and enterprise AI applications. Alphabet's Google is rapidly integrating AI into its core search business and other services, potentially reinvigorating its growth.

However, there are factors to be wary of. For $Microsoft(MSFT)$, its premium valuation means it may have less room for error. Any disappointment in earnings or guidance could lead to a sharp correction. For Alphabet, the main concern is whether its core advertising business can withstand potential economic headwinds and increasing competition from AI-powered alternatives.

It's worth noting that several analysts recently upgraded MSFT, citing its strong cloud performance, while GOOGL's outlook might hinge on upcoming analyst revisions following its earnings report.

The Verdict: Which Stock to Choose?

Both stocks present compelling investment opportunities, but for different reasons. Microsoft offers a more stable, diversified play on AI and cloud computing, with a proven track record of monetising new technologies. Alphabet, while facing more uncertainty, potentially offers greater upside if it can successfully navigate the AI transition and maintain its dominance in digital advertising.

If I had to choose one, I’d lean towards Alphabet at this juncture. Its more attractive valuation and the potential for AI to reinvigorate its core business make it an intriguing prospect. However, both stocks warrant consideration for a well-balanced tech portfolio.

Timing: When to Make Your Move

While both stocks have seen significant gains this year, the upcoming earnings reports could provide clarity on their AI strategies and financial health. Investors might consider waiting for these reports before making any significant moves.

With AI rapidly transforming industries, will Microsoft and Alphabet continue to be the dominant forces, or will the future belong to innovative challengers yet to emerge?

In conclusion, both Microsoft and $Alphabet(GOOGL)$ are at the forefront of the AI revolution, and their upcoming earnings reports will be crucial in understanding their trajectories. While Microsoft offers stability and proven execution, Alphabet's potential for transformation and more attractive valuation make it a compelling choice for investors willing to accept a bit more risk. As always, consider these investments in the context of your overall portfolio strategy and risk tolerance.

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