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The thunderous rally in artificial intelligence (AI) stocks has been hard to miss. As OpenAI's ChatGPT gained mainstream acceptance, investors have made a beeline for stocks with exposure to the booming AI market. As one of the primary drivers of the overall market action for the better part of the last two years, it's fair to say that AI has well and truly arrived, with the investing theme firmly entrenched in the minds and portfolios of most market participants.
But with the AI market, valued at about $621 billion in 2024, projected to clock a CAGR of 20.4% between now and 2032 to reach a staggering size of $2.7 trillion, this trend still seems to be in its early innings. To best leverage the expected long-term growth in AI, investors should be wary of deploying their capital into the stocks of dubious companies that are “AI pretenders” rather than real innovators working on and benefiting from the technology, as the obvious parallels to the dot-com bubble around the turn of the millennium cannot be missed.
Here is where Microsoft (MSFT) and Oracle (ORCL) come into the picture. Having been around for decades and survived a few challenging business cycles - including the aforementioned tech bubble - these two software giants are now moving into the forefront of the AI revolution, albeit in different ways. With well-established fundamentals and strong business prospects, stocks of both tech giants have garnered positive reviews from the analyst community, and are projected to deliver outsized earnings growth. But which one is a better fit for your portfolio? Here's a closer look at both.
Microsoft
Co-founded by Bill Gates almost five decades ago, Microsoft (MSFT) began as a small software startup and has now grown into a multinational technology company that develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services. Its key products have become household brand names over the years, including Windows, MS Office, Azure, and Xbox. The company commands a gargantuan market cap of $3.08 trillion.
MSFT stock is up 10.6% on a YTD basis, and it also offers a modest dividend yield of 0.72%. The company has been raising dividends for the past 19 years, and with a payout ratio of just 25.4%, there's room for additional growth.
Microsoft's latest quarterly results were impressive, after the company's fiscal Q4 revenue and earnings came in ahead of consensus estimates. MSFT reported revenues of $64.7 billion in Q4, up 15.2% from the previous year. A 31% YoY increase in Service and other revenues drove the overall growth, as revenues from the Product segment dipped 21.6% in the same period.
EPS grew by 10% from the prior year to $2.95, outpacing the consensus estimate. Notably, this marked the eighth consecutive quarterly earnings beat by the company. Overall, over the past 10 years, Microsoft's revenue and EPS have clocked CAGRs of 10.94% and 14.85%, respectively.
Net cash from operations soared to $37.2 billion in the fourth quarter, up from $28.8 billion in the previous year, as the company closed the quarter with a cash balance of $18.3 billion.
As for Microsoft's AI capabilities, its multi-billion dollar investment in OpenAI's ChatGPT is well known. Moreover, in Q4, the company spent $19 billion as capex on AI.
Apart from that, Microsoft's generative AI assistant, Copilot, is now integrated into various apps and platforms within its ecosystem, which resulted in a 60% increase in its customer count yearly. This demonstrates the product's quality and adoption.
Additionally, Azure AI customers grew 60% year over year, with the cloud segment reporting revenues of $28.5 billion (up 18.9% YoY). The company highlighted growth in $10 million and $100 million+ deals for Azure and Microsoft 365, indicating strong customer commitments to long-term AI-led contracts.
Looking ahead, analysts are forecasting forward revenue growth of 14.65% and EPS growth of 16.60% for MSFT, compared to the sector medians of 6.47% and 6.98%, respectively.
Overall, analysts have deemed the stock a “Strong Buy” with a mean target price of $499.58, which denotes an upside potential of roughly 20% from current levels. Out of 39 analysts covering the stock, 35 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 1 has a “Hold” rating.
Oracle
Founded in 1977 and based out of Austin, Oracle (ORCL) is a multinational computer technology corporation specializing in enterprise software, cloud computing systems, and computer hardware. The company's primary offerings are software licensing, cloud services, and hardware sales. ORCL currently commands a market cap of $380.5 billion.
Oracle's share price is up about 31.9% on a YTD basis, beating the broader equities market, and it also offers a dividend yield of 1.16%, backed by 9 years of consistent growth. With a modest payout ratio of just 28.73%, Oracle has scope to raise its dividends further in the years ahead.
However, Oracle's results for the latest quarter were not up to the mark, as its fiscal fourth-quarter revenue and earnings failed to surpass expectations. However, revenues increased by 3.3% from the prior year to $14.3 billion, with its cloud services business rising by 9.2% in the same period to $10.2 billion.
EPS dipped by 2.4% from the prior year to $1.63, missing the consensus estimate of $1.65. This was the first time in seven quarters that Oracle's EPS missed estimates.
Oracle generated net cash from operations of $18.7 billion in FY24, up from $17.2 billion in FY23, with a rise in free cash flow to $11.8 billion from $8.5 billion in the prior year. Overall, the company closed the quarter with a cash balance of $10.4 billion. Although this is much lower than its debt levels of $86 billion, most of its debt is more than five years out.
Currently, Oracle is innovating in AI by training models directly on customer data, within their infrastructure. This enhances privacy, security, and accuracy by eliminating the need to transfer sensitive information to the cloud. Its competitive advantage lies in the fact that its cloud area network is nimbler than its peers, leading to lesser costs for its customers. This has led to the “world's most successful and accomplished AI companies to use Oracle cloud services and data centers,” according to CEO Safra Catz.
Oracle has bagged some key customers, too, including a $10 billion cloud contract received from Elon Musk-led startup xAI. Reportedly, Musk wants to rent Oracle's cloud servers for several years. Oracle also recently formed a pact with data analytics company Palantir (PLTR) to offer AI solutions to governments and businesses. Moreover, in early June, it signed an agreement with OpenAI, despite OpenAI's close relationship with Microsoft and its existing usage of Microsoft Azure, to provide additional cloud capacity.
Furthermore, Oracle has integrated generative AI features into their Fusion Cloud Applications Suite. This suite offers a comprehensive set of ERP, EPM, SCM, HCM, and Customer Experience tools built on the Oracle Cloud platform. The impact is evident, as Oracle has secured at least 40 new billion-dollar AI contracts that haven't yet been implemented, showcasing the value proposition of this approach.
Analysts are forecasting ORCL to deliver robust earnings growth going forward. On average, forward EPS growth is expected to be 21.29%, well above the sector median of 6.98%. ORCL is currently priced cheaper in terms of its projected earnings growth, although its earnings per share are not quite in the same league as $3 trillion giant Microsoft.
Overall, analysts have a rating of “Moderate Buy” for ORCL stock, with a mean target price of $149.64 - which denotes an upside potential of roughly 7.5% from current levels. Out of 29 analysts covering the stock, 17 have a “Strong Buy” rating and 12 have a “Hold” rating.
