In today's tech-driven world, internet applications and software services have seamlessly integrated, driving automation and digitalization across sectors.
The increasing use of generative AI and demand for IoT, along with the rise of social commerce, contribute to the growth of the software and internet sectors. In 2023, Statista states that global internet users reached 5.4 billion, up from 5.3 billion in 2022, covering almost 67% of the world's population. Gartner predicts that spending on software will increase by 12.7% over the prior year to $1.03 trillion this year.
The growth is driven by fast 5G, blockchain, cloud services, remote work trends, and collaborative tools, boosting internet utilization and increasing demand for unified software services and products. The internet services market is predicted to reach $733.79 billion by 2031, with a 4.4% CAGR.
Furthermore, the global business software and services market is forecasted to grow at a CAGR of 11.9% until 2030.
Given this backdrop, let’s compare the stocks Microsoft Corporation (MSFT) and Alphabet Inc. (GOOGL) to understand why GOOGL is a better buy.
The Case for Alphabet Inc. Stock
Alphabet Inc. (GOOGL) offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America. It operates through Google Services, Google Cloud, and Other Bets segments.
GOOGL’s stock has gained 5.6% over the past month to close the last trading session at $164.81. In addition, GOOGL has gained 47.6% over the past year.
GOOGL’s EBIT grew at a CAGR of 25% over the past three years. Its revenue grew at a CAGR of 17.4% over the past three years. Moreover, its EBITDA grew at a CAGR of 20.3% during the same period.
In terms of forward non-GAAP PEG, GOOGL is trading at 1.18x, 13.4% lower than the industry average of 1.36x. However, its forward EV/Sales is trading at 5.81x, 216.8% higher than the 1.83x industry average.
In terms of the trailing-12-month EBITDA margin, GOOGL’s 34.49% is 87.4% higher than the 18.41% industry average. Likewise, its 11.94% trailing-12-month CAPEX / Sales is 239% higher than the industry average of 3.52%. Moreover, its 17.31% trailing-12-month levered FCF margin is 118.3% higher than the 7.93% industry average.
For the fiscal first quarter that ended March 31, 2024, GOOGL’s revenues rose 15.4% year-over-year to $80.54 billion. Its operating income came in at $25.47 billion, up 46.3% over the prior year quarter. The company’s net income rose 57.2% year-over-year to $23.66 billion. In addition, its EPS rose 61.5% from the year-ago value to $1.89.
Analysts expect GOOGL’s EPS and revenue for the quarter ending June 30, 2024, to increase 27.7% and 12.5% year-over-year to $1.84 and $83.95 billion, respectively.
GOOGL’s stock is trading above its 100-day and 200-day moving averages of $147.88 and $140.41, respectively.
GOOGL’s POWR Ratings reflect its bright prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Sentiment and a B for Quality. Within the B-rated Internet industry, it is ranked #7 out of 53 stocks. Beyond what we stated above, we also have given GOOGL grades for Growth, Value, Momentum, and Sentiment. Get all the GOOGL ratings here.
The Case for Microsoft Corporation Stock
Microsoft Corporation (MSFT) develops and supports software, services, devices and solutions worldwide. The company’s segments include Productivity and Business Processes, Intelligent Cloud segment, and More Personal Computing.
MSFT’s stock has gained 31.8% over the past year to close the last trading session at $411.68. On the other hand, the stock has declined 2.8% over the past month.
MSFT’s revenue grew at a CAGR of 13.9% over the past three years. Its levered FCF grew at a CAGR of 17.5% over the past three years.
In terms of forward non-GAAP P/E, MSFT is trading at 35.06x, 49.8% higher than the industry average of 23.41x. In addition, the stock’s forward EV/Sales of 12.69x is 352.9% higher than the industry average of 2.80x.
In terms of the trailing-12-month EBIT margin, MSFT’s 44.70% is 909.7% higher than the 4.43% industry average. Its 36.43% trailing-12-month net income margin is significantly higher than the 2.40% industry average. However, the stock’s 0.55x trailing-12-month asset turnover ratio is 9.9% lower than the 0.61x industry average.
MSFT’s total revenue for the fiscal third quarter that ended March 31, 2024, increased 17% year-over-year to $61.86 billion. Its operating income rose 23.4% year-over-year to $27.58 billion. Moreover, the company’s net income and EPS rose 19.9% and 20% year-over-year to $21.94 billion and $2.94, respectively.
Street expects MSFT’s EPS for the quarter ending June 30, 2024, to increase 9% year-over-year to $2.93. Its revenue for the same quarter is expected to increase 14.6% year-over-year to $64.41 billion. It surpassed the consensus EPS and revenue estimates in three of the trailing quarters.
MSFT’ s stock is trading above its 10-day and 50-day moving averages of $405.15 and $413.75, respectively.
MSFT’s mixed fundamentals are reflected in its POWR Ratings. It has an overall rating of C, equating to a Neutral in our proprietary rating system.
It has a C grade for Growth, and Momentum. Within the Software - Business industry, MSFT is ranked #19 out of 43 stocks. To see the additional grades of MSFT for Value, Stability, Sentiment, and Quality, click here.
MSFT vs GOOGL: Which Tech Giant Will Drive May Profits?
The internet has seamlessly integrated into our daily routines, enabling digitalization across various sectors. Mobile and computer software are essential in corporate and consumer communication, entertainment, e-commerce, and risk management, demonstrating promising growth in these areas.
Businesses have notably enhanced customer services by effectively utilizing advanced technologies, software automation, and fast connectivity, resulting in greater convenience and efficiency. Tech giants like MSFT and GOOGL stand to gain from the growing demand for software solutions and the transformative impact of high-speed internet on how we interact with and experience software applications.
Both MSFT and GOOGL have strong fundamentals and historical growth, but GOOGL appears to be a better choice than MSFT due to its solid price performance, robust profitability, and slightly discounted valuation compared to MSFT.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Internet industry here. In addition, click here to access all the top-rated stocks in the Software - Business industry.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
MSFT shares were trading at $414.06 per share on Monday afternoon, down $0.68 (-0.16%). Year-to-date, MSFT has gained 10.31%, versus a 9.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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