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The Rise of AI Stocks: A Close Look at Meta and Microsoft
The tech sector has been a major driver of market gains over the past year, with AI stocks paving the way. This technology has the power to reshape the tech landscape and the broader economy, presenting lucrative opportunities for investors.
However, not all AI stocks are guaranteed to succeed. Some are poised to lead in innovation and yield higher returns, prompting Wall Street analysts to sift through the stock market to identify promising investments.
In the AI/tech space, Oppenheimer analysts are offering differing perspectives on two industry titans: Meta Platforms (NASDAQ:META) and Microsoft (NASDAQ:MSFT). Both companies have made significant strides in AI recently; Microsoft was an early investor in generative AI, while Meta has been discovering innovative applications for the technology.
Let’s explore which of these companies stands out as the superior AI investment, according to the investment bank’s analysts.
A Dive into Meta Platforms
First up is Meta, the parent company of Facebook and a leader in the social media realm. Originally founded as Facebook 20 years ago, the company rebranded to Meta Platforms in 2021 following several high-profile acquisitions. Today, Meta operates Facebook, Instagram, Messenger, and WhatsApp, which together reach a staggering 3.27 billion Daily Active Users (DAUs) as of the second quarter of 2024. This impressive number reflects nearly 40% of the global population, making the company’s audience a valuable asset.
Meta’s audience is central to its primary revenue source: digital advertising. In the most recent quarter, the company reported a 10% increase in ad impressions across its platforms, alongside a 10% rise in the average price paid per ad. These factors contributed to a remarkable 22% year-over-year revenue jump, reaching $39.07 billion, which exceeded forecasts by $760 million. On the earnings side, Meta posted an EPS of $5.16, surpassing expectations by 40 cents.
Yet, the solid revenues and consistent profits are only part of the picture. Meta is investing in the future of online interaction by focusing on AI. The company has progressively utilized AI for targeted digital advertising and improved translation algorithms, making its services more accessible globally.
Key developments in generative AI are spotlighted by two major projects. First, there’s Llama, Meta’s open-source AI software model. Llama 3 was released, facilitating a user-friendly AI environment adaptable to individual needs as the public can contribute to its improvement.
Alongside Llama, Meta has introduced an online AI chatbot called Meta AI. Now available across all its social platforms, this tool has garnered significant attention, boasting 400 million monthly active users as of August. Designed to compete with ChatGPT, Meta AI is on a robust growth trajectory.
Oppenheimer analyst Jason Helfstein highlights the significance of Meta AI, noting its expansion and likely benefits for the company. “META AI is on track to be the most-used AI assistant by year-end, ~500M MAU, with more country launches,” he remarked. He believes that long-term advantages stemming from AI content recommendation, ad targeting, and messaging will entice investors, supporting Meta’s value in the future.
As a result of these insights, Helfstein maintains an Outperform (Buy) rating on Meta’s shares, with a price target of $615, suggesting a modest 4% gain in the next year. Despite a robust 68% increase year-to-date, the consensus among analysts leans towards a Strong Buy, with the average target price at $611.20, indicating just a 3% potential upside. (See Meta stock forecast)
Microsoft Corporation: A Powerful Player in AI
Turning our attention to another tech powerhouse, Microsoft has a long-standing presence in the PC market, dating back to the 1970s and 80s. It has established Windows and Office as essential software for homes and businesses alike. The company’s smart marketing has made its products synonymous with quality and familiarity, leading to a current market cap of $3.08 trillion, securing its position as the third-largest publicly traded company globally.
Microsoft has not rested on its past achievements. Rather, it is leveraging its extensive resources and expertise to adapt to the rapidly changing tech landscape. A prime example of this is the integration of AI in its Windows operating system and Office software through the AI-powered Copilot feature.
This integration is possible due to Microsoft’s early investment in generative AI technology. The company invested $13 billion in OpenAI, the creator of ChatGPT. In exchange, they secured 75% of OpenAI’s future profits, which will decline to 49% once the initial investment is recouped.
This substantial investment has diversified Microsoft’s income streams and allowed for the enhancement of Bing, its search engine. The incorporation of AI has improved the search engine’s functionality, making it more responsive and competitive with Google.
AI’s influence has also become increasingly significant in Microsoft’s cloud computing service, Azure, which continues to evolve alongside advancements in AI technology.
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Microsoft’s Azure Ambitions: A Look at Financial Performance and Market Outlook
In a competitive landscape with Google Cloud and Amazon Web Services, Microsoft is enhancing its Azure platform with over 200 cloud-based software tools while incorporating Artificial Intelligence (AI), aiming for broader flexibility and improved user experience.
Microsoft’s Financial Powerhouse
Investing in AI technology isn’t inexpensive; however, Microsoft is well-equipped to handle these costs due to its strong financial foundation. In its fiscal fourth quarter of 2024, Microsoft reported impressive revenue of $64.7 billion, exceeding expectations by $260 million and marking a 15% increase from the previous year. Earnings reached $2.95 per share, up 10% year-over-year, also surpassing forecasts by 2 cents.
Azure’s Growth: A Mixed Reality
Despite its overall success, the Azure segment faced a slight slowdown in growth, recording a 29% year-over-year increase, which fell short of analysts’ expectations for 30% to 31% growth.
Expert Caution Amidst Optimism
Timothy Horan, a five-star analyst from Oppenheimer, expresses concerns about potential challenges within the AI sector. In a recent note, he stated, “We believe estimates for revenue and EPS are too high. OpenAI losses may hit $2-3 billion in FY25, a factor we had not previously included in our models. Our AI analysis indicates that businesses are slow to embrace AI, which may lead to disappointing revenue numbers. Increased capital expenditures are also set to raise depreciation costs, lower interest income, and elevate operational expenses. As Microsoft invests in transformative technology, it’s unlikely that expanding margins will be a top priority soon. The stock is currently trading in the mid-range of its five-year price-to-earnings ratio of approximately 25x-35x and may trend towards the lower end.”
Following this analysis, Horan downgraded his rating on Microsoft (MSFT) from Outperform to Perform (Hold) and refrained from setting a price target for the stock.
Wall Street’s Bullish Sentiment
Despite Oppenheimer’s cautious stance, Wall Street is largely optimistic about Microsoft’s prospects. The latest reviews indicate a Strong Buy consensus rating with 22 out of 30 analysts recommending the stock as a Buy or Hold. Furthermore, the average price target of $504.73, relative to a trading price of $414.71, suggests a potential upside of approximately 22% over the next year.
For investors seeking promising stocks at favorable valuations, TipRanks offers “Best Stocks to Buy,” a resource aggregating valuable equity insights.
Disclaimer: The views expressed in this article belong to the featured analysts and are intended for informational purposes only. Conducting your own research before investing is strongly recommended.
The viewpoints shared here are those of the author and do not necessarily align with those of Nasdaq, Inc.
