As earnings season approaches, everyone is watching the tech giants Alphabet, Microsoft and their financial results.
Microsoft will release its earnings results on October 30, followed by Alphabet, which is the parent company of Google.
Barron’s reports that despite both companies’ gains this year, Microsoft’s shares appear to be a better play going into earnings as Alphabet struggles with regulatory headwinds, and increased competition in the artificial-intelligence (AI) space.
Microsoft’s stock is up 11% this year, to $416.72. Alphabet has gained 17% to $162.93.
Both stocks have fallen since their July peaks, which were $191.18 per Alphabet, and $467.56 per Microsoft. This is due to broader market challenges, which affected mega-cap tech firms over the summer.
Challenges facing Alphabet
Alphabet’s recent struggles are largely attributed to the growing concerns about capital expenditures and regulatory demands.
Alphabet reported in the second quarter that capital expenditures had risen to $13.2 billion from $12 billion the previous quarter. This was due to investments in AI infrastructure.
Google’s dominant search market position is at risk as AI rival search engines become more competitive.
This competition could affect its long-term profitability and erode market share.
Alphabet is also facing legal battles which could have a significant impact on its business model.
In August, the US Department of Justice suggested that Google’s monopoly on the general text advertising and search markets could be broken up.
Itau BBA analyst Thiago Capulskis expressed concern about the potential effects of these regulatory challenges in a recent report.
The proposed remedies make us more bearish as we perceive the potential risk of structural change in the search market. This is a key driver for Alphabet’s profit.
He said, “If a competitor emerges, Alphabet’s economy could be materially impacted.”
Alphabet stock could remain under pressure until the company gives strong guidance during its earnings call on AI investments and the future of the search industry.
A failure to impress can lead to a further decline in the share price.
Microsoft’s growth and AI investments
Microsoft, on the other hand, appears to be in a better position going into earnings.
Microsoft, like Alphabet has invested heavily in AI. However, its AI-related expenditure, notably through its partnership with OpenAI (creator of ChatGPT), is seen as a long-term strategic move.
Many analysts believe that Microsoft’s Azure cloud computing business is the real driver of future growth.
Brad Sills is an analyst at BofA Securities who remains optimistic about Microsoft’s prospects. He rates the stock as Buy and has a price target of $510. Sills wrote in a research note:
We believe that Azure’s growth will accelerate in the second half, which will be a positive catalyst to the shares.
This growth in Microsoft’s Cloud business could give the company a significant boost, solidifying it as an investor’s top pick.
Analyst ratings and valuations
According to FactSet the majority of analysts are bullish on both companies.
Only one analyst out of 58 analysts who cover Microsoft rates it as a sell.
Of the 68 analysts who cover Alphabet, 54 recommend a Buy rating, while none recommend a Sell.
Alphabet’s value reflects some of its regulatory and AI challenges.
The stock is currently trading below its five-year median of 23 times expected earnings in the next 12 month, at a ratio of 19.5 times.
Microsoft, however, trades at 30.1 times its projected earnings, which is slightly higher than the average of 29.3 over the past five years.
This post Alphabet vs. Microsoft earnings: Microsoft is the safer bet first appeared on The ICD
This site is for entertainment only. Click here to read more
