To The Moon

AI has been a hot topic in the news lately, with OpenAI’s ChatGPT gaining widespread popularity for its ability to interact with users, answer follow-up questions and challenge incorrect assumptions. AI is now recognised as the next frontier for growth and is expected to grow from a market size of US$ 119.78 billion in 2022 to US$ 1,597.1 billion by 2030 with a registered CAGR of 38.1%. Two tech giants which recently showcased their latest AI projects to investors include $Alphabet(GOOGL)$ and $Microsoft(MSFT)$ . However, investors have had contrasting reactions to the showcase, with GOOGL shares falling more than 7% after its AI announcement, whereas MSFT shares are currently up more than 20% since the January lows. In this article, I explain why I sold my position in Google to buy Microsoft shares due to my investment thesis and conviction on Microsoft, beyond its AI capabilities. Google’s ad business faces headwinds First, let’s discuss the elephant in the room: Google’s advertising business. In its recent quarterly results, Google reported a 5% decline in advertising revenue due to cyclical headwinds and increased competition. The tough macroeconomic operating environment has negatively affected many tech companies, with even the largest companies such as Google proving that they are not immune to the weakness. More concerning, however, is long-term industry competition which could significantly affect the growth of Google’s business going forward. The emergence of new threats such as TikTok could prove to be a thorn in the flesh of the company, drawing users away from Google Search. TikTok has been gaining widespread popularity among Gen Z users and directly competes with Google’s own streaming platform, YouTube. Competitors have struggled to keep up with the popularity of TikTok as both Facebook Ads and YouTube shorts have failed to create a huge impression among users thus far. Additionally, the emergence of AI could yet disrupt the search and advertising industry and uproot Google’s dominance. Recently, Microsoft unveiled a brand new AI-powered Bing search engine and Edge browser to deliver better search, more complete answers, a new chat experience and the ability to generate content. While Google (Chrome) still dominates the Desktop Brower Market Share, Edge’s new AI capabilities could level the playing field and present a serious threat to Google’s domination. Over the past few years, MSFT has invested more efficiently in AI in comparison to Google, giving it a head start in the race to develop fully integrated AI services. Therefore, I believe that MSFT possesses an advantage in terms of AI capabilities and is better positioned to reap the growth of AI in the search and advertising market. Microsoft has a better defensive moat Despite competing with Google in search and news advertising, the bulk of Microsoft’s revenue comes from other business segments including Productivity and Business Processes, Intelligent Cloud and More Personal Computing. While Google’s ad business may be exposed to cyclical weakness, the high switching costs and barriers to entry in Microsoft’s commercial and cloud businesses prevent customers from canceling their subscriptions or purchases due to temporary budget cuts. This is a testament to Microsoft’s ability to integrate and develop software which has become fundamental to the operation of businesses and an integral part of our everyday lives. Thus, Microsoft’s outstanding track record in designing and integrating innovative products and solutions makes it an attractive business to invest in. Additionally, Microsoft’s Intelligent Cloud business segment, Microsoft Azure, is the 2nd largest cloud service provider behind AWS and leading Google Cloud. Azure continues to grow revenue by 30% annually, driven y strong demand for its consumption-based services. Valuation and price targets for MSFT and GOOGL As explained in my investment thesis, I project MSFT to grow its revenue at a faster rate than Google, as it continues to leverage AI to enhance the core competencies of its products and services. Using a 5-year DCF model, my price target for GOOGL and MSFT stocks are $110 and $315 respectively, giving them an upside of 16.8% and 20%. This means that MSFT currently is slightly more undervalued than GOOGL and would yield greater returns in the future. Therefore, I believe that investors should also consider buying MSFT stock given its stellar fundamentals and dominant position in the software space. @TigerStars @CaptainTiger @TigerEvents