Microsoft (MSFT) and Alphabet (GOOGL), the parent company of Google, are often mentioned as leaders in the artificial intelligence (AI) arms race. Both companies have been investing in AI for years and have strong market positions. Morningstar analysts recently discussed the outlook for AI and how it may impact these tech giants.
According to Morningstar, investors should not expect AI to have an outsized impact on Microsoft or Alphabet’s results in the near future. However, they agree that these companies are well-positioned to profit from AI in the long term due to their significant hardware and infrastructure investments.
In terms of investment metrics, Morningstar’s analysis shows that Alphabet’s stock is currently trading at a more attractive price. Its stock is 23% undervalued, while Microsoft’s stock is slightly overvalued by about 1%.
When it comes to cash flow uncertainty, Microsoft scores better with a medium rating compared to Alphabet’s high rating. This means Morningstar has more confidence in its fair value estimate for Microsoft’s stock.
Both Microsoft and Alphabet have carved out wide economic moats, indicating a maintainable competitive advantage for these companies.
Regarding capital allocation, both Microsoft and Alphabet earn an exemplary rating from Morningstar. This means they are deemed to be managing their balance sheets, investments, and shareholder distributions well.
Morningstar’s perspective on the winner of this stock matchup is based on the stock trading at the largest discount to its fair value estimate after adjusting for uncertainty. Alphabet’s stock carries a 4-star rating, while Microsoft’s stock has a 3-star rating, suggesting that Alphabet is currently the better stock to buy according to Morningstar.
It’s worth noting that AI, despite being a significant trend in the tech industry, may not have an immediate impact on the financial performance of these companies. However, given their strong market positions and investments in AI, Microsoft and Alphabet are well-positioned to capitalize on its potential in the long term.
Investors looking to benefit from AI in the tech sector may find investing in Microsoft or Alphabet appealing. They should consider Morningstar’s analysis and metrics to make an informed decision based on their investment preferences.
Overall, the outlook for both Microsoft and Alphabet remains positive, with their AI initiatives playing a significant role in their long-term growth prospects. It will be interesting to see how these tech titans continue to evolve and innovate in the AI landscape, solidifying their positions as leaders in this field.
