As Artificial Intelligence (AI) applications accelerate across various sectors, businesses and consumers are rapidly boosting their AI adoption and investment. Amid the AI boom, fundamentally sound AI stocks Microsoft Corporation (MSFT) and Alphabet Inc. (GOOGL) could be solid investments now.
AI is shaping the future of humanity across nearly every industry. It has already become the primary driver of emerging technologies such as big data, robots, and the Internet of Things (IoT), not to mention generative AI, with tools like ChatGPT and AI art generators attracting widespread interest worldwide.
There is a burgeoning demand for AI among various end-use verticals, including automotive, healthcare, finance, logistics, manufacturing, and retail. Businesses and consumers have been aggressively adopting AI and investing billions of dollars in AI-related products and services, highlighting their commitment to leveraging the potential of AI.
According to a Forbes Advisor survey, business owners are using or planning to incorporate AI across a wide range of areas to improve their operational efficiencies, reduce costs, and save time. The most popular application includes customer service, with 56% of businesses using AI for this purpose.
For cybersecurity and fraud management, AI is adopted by 51% of respondents. Other applications of AI include digital personal assistants (47%), customer relationship management (46%), and inventory management (40%). Also, businesses leverage AI for content production (35%), product recommendations, accounting (30%), and supply chain operations (30%).
Furthermore, Goldman Sachs (GS) strategists predict that the widespread adoption of generative AI could lead to a 4-percentage-point increase in profit margins for S&P 500 companies over a decade.
According to a report by Fortune Business Insights, the global AI market size is expected to reach $2.03 trillion by 2030, growing at a 21.6% CAGR.
Given AI’s promising growth prospects, industry leaders MSFT and GOOGL, already dominant in the software and services markets, are expected to maintain their strong positions. These companies have already integrated AI into their services and are expected to continue to capitalize on the growing AI trend.
Let’s delve deeper into the fundamentals of these stocks.
Microsoft Corporation (MSFT)
MSFT develops, licenses, and supports software, services, devices, and solutions. Its segments include Productivity and Business Processes; Intelligent Cloud; and More Personal Computing. The company’s offerings include Office, Exchange, Office 365 Security and Compliance, Microsoft Viva, Skype for Business, Outlook.com, and more.
On April 17, MSFT and Epic announced an expansion of their strategic collaboration to integrate generative AI into healthcare. The partnership combines the power of Azure OpenAI Service with Epic's leading EHR software, enabling MSFT to address urgent healthcare challenges and provide comprehensive solutions to providers.
On March 28, MSFT made a significant advancement in cybersecurity by introducing Microsoft Security Copilot, the next generation of AI technology. The innovative tool equips defenders with the capability to swiftly detect and respond to threats while gaining a comprehensive understanding of the threat landscape.
In an industry where cybersecurity professionals face overwhelming odds, Security Copilot would empower MSFT to tip the balance of power in its favor. It is the first and only generative AI security product that enables defenders to operate at the speed and scale of AI.
During the fiscal 2023 third quarter that ended March 31, MSFT’s revenue increased 7.1% year-over-year to $52.86 billion, while its gross margin grew 8.8% from the year-ago value to $36.73 billion. In addition, the company’s net income rose 9.4% year-over-year to $18.30 billion, and EPS came in at $2.45, up 10.4% from the prior year’s period.
The consensus revenue estimate of $211.08 billion for the fiscal year ending June 2023 reflects a 6.5% year-over-year improvement. Likewise, the consensus EPS estimate of $9.61 for the current year indicates a 4.3% rise year-over-year. Moreover, the company surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Over the past six months, the stock has gained 37.7% to close the last trading session at $332.89.
MSFT’s robust fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
MSFT has a B grade for Stability, Quality, and Sentiment. It is ranked #11 in the 50-stock Software - Business industry.
In addition to the POWR Ratings I’ve just highlighted, you can see MSFT’s ratings for Value, Growth, and Momentum here.
Alphabet Inc. (GOOGL)
GOOGL offers products and platforms through its Google Services; Google Cloud; and Other Bets segments. Google Services covers ads, Chrome, YouTube, and more. Google Cloud provides infrastructure, platform services, collaboration tools, and enterprise solutions, while Other Bets includes health technology and Internet services.
On May 23, GOOGL introduced Product Studio, a powerful generative AI tool in Merchant Center Next that would empower merchants to craft unique product visuals vital for e-commerce success effortlessly. This could provide value-added solutions to enhance product presentations on GOOGL's platform.
Also, on May 18, GOOGL unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator powered by generative AI. It offers real-time code suggestions, chat assistance, and customizable features designed for enterprise requirements.
The introduction could significantly enhance productivity in enterprise development, making GOOGL's cloud offerings more appealing to developers and solidifying its market position.
For the first quarter that ended March 31, 2023, GOOGL’s revenues increased 2.6% year-over-year to $69.79 billion. As of March 31, 2023, the company’s cash and cash equivalents stood at $25.92 billion, compared to $21.88 billion as of December 31, 2022. Furthermore, its total assets amounted to $369.49 billion, up from $365.26 billion as of December 31, 2022.
Analysts expect GOOGL’s revenue to increase 5.9% year-over-year to $299.49 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is expected to rise 16.9% year-over-year to $5.33. Shares of GOOGL have gained 29.7% over the past six months to close the last trading session at $124.61.
GOOGL’s positive outlook is apparent in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
GOOGL has an A grade for Sentiment and a B for Quality. It is ranked #13 out of 58 stocks within the Internet industry.
Click here to access additional GOOGL ratings for Value, Stability, Growth, and Momentum.
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MSFT shares were trading at $332.89 per share on Monday afternoon, up $6.97 (+2.14%). Year-to-date, MSFT has gained 39.46%, versus a 10.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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