Yahoo Finance Microsoft and Alphabet Earnings Review: Buy One, Avoid the Other
The two tech behemoths Microsoft MSFT and Alphabet GOOGL reported Q2 earnings Tuesday after the market closed, and one stock is rallying, while the other is selling off. Although these are just the immediate reactions, I believe one stock will offer superior returns over the coming months.
Alphabet delivered impressive results with a remarkable EPS surprise of 9.09% and a sales surprise of 3.03%. These outstanding figures translate to a substantial 19% increase in quarterly EPS growth compared to the same period last year, along with an impressive 8% gain in sales growth. GOOGL stock is up over 6% in the morning session of trading.
Microsoft has delivered favorable results as well, with a positive EPS surprise of 5.91% and a sales surprise of 1.50%. These strong figures indicate a significant 20.6% rise in earnings compared to the same period last year, accompanied by an 8.32% increase in sales. However, the stock faced a -4% decline in the morning trading session as quarterly guidance fell below expectations.
Both stocks have offered exceptional returns over the last decade and boast some of the strongest business models in the market today, so there is no discounting the fact that they are both some of the best stocks out there. But I think Alphabet will be the winner over the coming months for several reasons.
Firstly, GOOGL currently has a valuation that is below its historical average, while Microsoft is well above its average. Second, Microsoft has likely already priced in much of its new AI business, while Alphabet’s has been overlooked. And lastly, GOOGL has a Zacks Rank #2 (Buy) rating, indicating upward trending earnings revisions, while MSFT has a Zacks Rank #3 (Hold).
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Business Breakdown
Microsoft and Alphabet both posted very impressive quarterly earnings results. To think that companies as large and mature as them can grow earnings 20% YoY and sales almost 10% like clockwork is truly amazing.
One way they do this is by building new businesses internally or acquiring businesses with higher growth. Like how GOOGL bought YouTube, which is now a huge cash producer.
One avenue that both businesses have ventured into is Cloud Services. Both GOOGL and MSFT’s cloud businesses are critical for growing both top and bottom lines. Impressively, each company saw cloud sales expand faster than expected, both experiencing 28% YoY sales growth. Additionally, GOOGL posted its second profitable quarter for the cloud.
Race in AI
Another industry the tech giants are venturing into is AI. Microsoft has clearly been leading the way with its investment in OpenAI, and new ChatGPT technology. Microsoft also recently announced its new Office 365 software, which will be enabled by AI, and could bring in an additional $30 billion annually.
The market went crazy over this announcement, and quickly added a few hundred billion in valuation to Microsoft stock, quickly pricing in this new business opportunity.
But now a lot of that new business has been priced in for Microsoft now, whereas Alphabet has received much less attention for its AI efforts. Alphabet’s access to truly epic amounts of data from Google search could make for advantages in its generative AI efforts. These AI models love big data sets, which contribute to the training and improvement of said models.
Valuations
Without any doubt, Alphabet currently has a more compelling valuation. GOOGL is trading at a one-year forward earnings multiple of 22.7x, which is just above the market average of 21.5x, and below its 10-year median of 26.5x. It is quite rare to get GOOGL stock so close to the market average and below its historical average.
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Microsoft on the other hand is trading near its 10-year high earnings multiple and well above its historical average. At 32.6x one-year forward earnings it is well above the market average of 21.5x, and its 10-year median of 26.5x.
Interestingly, both Microsoft and Alphabet share a 10-year median earnings multiple, making the comparison even more clear.
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Zacks Rankings
Not only does GOOGL have a better Zacks Rank than MSFT, but it is also expected to grow its earnings at nearly twice the rate.
Alphabet is projected to grow current quarter earnings by 26.4% YoY, while Microsoft is expected to increase them by 9.4%. For FY23, Alphabet is forecast to grow earnings 18.2% YoY, while Microsoft is set to grow them by 10.6%.
Bottom Line
While none of the figures out of Microsoft worth balking at, I believe Alphabet currently has the better setup going forward. Microsoft has been front and center for most of the year, and while Alphabet has also done well, it is time for Microsoft to take a breather, and work off some of that multiple expansion.
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