Alphabet Faces Challenges While Microsoft and Oracle Thrive

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google, has seen its stock decline by approximately 17% this year, while the S&P 500 has only dipped 1%. This downturn comes amid ongoing challenges, including adverse macroeconomic conditions, stiff competition, and regulatory scrutiny.

Current Challenges for Alphabet

Alphabet’s advertising revenue is struggling due to a weakened macro environment. Furthermore, its core search engine faces intense competition from platforms like OpenAI’s ChatGPT. Compounding these issues, the U.S. Department of Justice is urging Alphabet to divest Chrome and share its valuable search data with rival companies. Additionally, the company is behind in the cloud infrastructure and artificial intelligence (AI) markets.

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Analysis of Future Growth

These headwinds have diminished Alphabet’s appeal to long-term investors. For 2025, analysts anticipate a revenue growth of 11% and earnings growth of 19%. However, Alphabet risks becoming a slow-growth stock akin to IBM if its main business segments continue to falter. Currently, its forward price-to-earnings ratio of 16 appears inexpensive, but skepticism regarding its ability to navigate competitive and regulatory challenges could keep its stock trading at a discount.

Alternatives: Microsoft and Oracle

Investors contemplating Alphabet may wish to explore two technology stocks with fewer challenges: Microsoft (NASDAQ: MSFT) and Oracle (NYSE: ORCL).

1. Microsoft

Since Satya Nadella became CEO in 2014, Microsoft has adopted a “mobile first, cloud first” strategy, reducing its dependence on desktop applications. The company has transitioned its productivity software to cloud-based services while expanding its cloud infrastructure with Azure. This strategy initially compressed operating margins but ultimately proved beneficial by locking in users to its mobile and cloud platforms.

As of now, Azure ranks as the second largest cloud infrastructure platform globally, following Amazon Web Services (AWS), while Google Cloud sits in third. Microsoft has also enhanced its Xbox gaming segment through significant acquisitions and the release of new Surface devices.

From fiscal 2014 to fiscal 2024 (ending June 2024), Microsoft’s revenue grew at an 11% compound annual growth rate (CAGR), with earnings per share (EPS) increasing at a 16% CAGR. Over the past decade, Microsoft’s stock has surged nearly 840%.

Looking forward, analysts anticipate Microsoft’s revenue and EPS will grow at CAGRs of 14% and 15%, respectively, from fiscal 2024 to fiscal 2027. With a forward price-to-earnings ratio of 29, the stock is reasonably valued, with significant expansion potential in cloud and AI sectors.

2. Oracle

Oracle, a leading database software provider, has also successfully pivoted towards cloud computing in recent years. Under CEO Safra Catz, since 2014, Oracle has replaced many on-premise applications with cloud services and expanded its cloud platform through strategic acquisitions, including Netsuite and Cerner.

This forward-thinking approach has allowed Oracle to compete effectively with major cloud players like Amazon and Microsoft. Between fiscal 2014 and fiscal 2024 (ending May 2024), Oracle’s revenue and EPS grew at CAGRs of 3% and 5%. The company has also repatriated significant overseas cash and executed share buybacks, reducing its outstanding shares by 35% over the past decade.

From fiscal 2024 to fiscal 2027, Oracle’s revenue and EPS are expected to rise at CAGRs of 13% and 19%, respectively, fueled by the growing AI market, which is attracting more customers to its cloud services. Furthermore, Oracle is developing its own cloud-based AI ecosystem featuring numerous AI models and tools for clients to train large language models with their proprietary data. Unlike Alphabet and Microsoft, Oracle is not currently facing major antitrust challenges.

While Oracle’s stock isn’t a bargain at 31 times next year’s earnings, the acceleration in growth alongside its involvement in the booming cloud and AI sectors may justify its valuation. For investors seeking stability, Oracle presents a strong alternative to Alphabet.

Investment Considerations for Alphabet

Before investing in Alphabet, potential investors should weigh current market sentiments carefully. Analysts have identified several promising stocks, many of which are not part of the Alphabet portfolio. Investors should conduct thorough research when considering allocations in volatile markets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.