Tech giant Microsoft Corporation (MSFT) needs no introduction. It develops, licenses, and supports software, services, devices, and solutions worldwide.

On the other hand, Advanced Micro Devices, Inc. (AMD) is a semiconductor pioneer operating in two segments, Computing and Graphics; and Enterprise Embedded and Semi-Custom.

While the U.S. economy remains riddled with macro headwinds, the stock market seems optimistic ahead of New Year. The S&P 500 and Dow Jones Industrial Average have gained more than 3000 points over the past week.

Moreover, according to the White House's chief economist, Jared Bernstein, "A recession is not inevitable. I think there are reasons to be optimistic that the path to a steady and stable transition is plausible and credible."

Furthermore, U.S. short-term inflation expectations have dropped to the lowest levels since June 2021. Respondents to the University of Michigan's final survey of consumers expressed that they expect prices to advance only 4.4% in 2023. Falling inflation rates are expected to boost overall markets substantially.

Big-name stocks MSFT and AMD are expected to benefit from the market's positive near-term outlook.

MSFT has lost 3.6% over the past month, while AMD has lost 15.6%. MSFT has gained marginally over the past three months, while AMD has lost 5.1%. But which of these stocks is the better pick now? Let's find out.

Latest Developments

On December 14, 2022, MSFT and Viasat, Inc. (VSAT) announced a new partnership to help deliver internet access to 10 million people around the globe, including 5 million across Africa. This is an essential partnership contributing toward worldwide internet inclusivity amid rapid digitalization.

On the other hand, on December 1, 2022, AMD and Viettel High Tech (Member of Viettel Group) announced the successful completion of a 5G mobile network field trial deployment. This collaboration for advanced 5G connection deployment is expected to be strategically beneficial for both companies.

Recent Financial Results

For its fiscal 2023 first quarter that ended September 30, 2022, MSFT's total revenue came in at $50.12 billion, up 10.6% year-over-year. Its adjusted net income came in at $17.56 billion, up 2% year-over-year, while its adjusted EPS came in at $2.35, up 3.5% year-over-year. Also, its operating income came in at $21.52 billion, up 6.3% year-over-year.

AMD's net revenue came in at $5.57 billion for the third quarter that ended September 24, 2022, up 29% year-over-year. However, its operating loss came in at $64 million compared to an income of $948 million in the year-ago period. Moreover, its net income came in at $66 million, down 92.8% year-over-year, while its EPS came in at $0.04, down 94.7% year-over-year.

Past and Expected Financial Performance

MSFT's revenue and EPS have increased at 16.1% and 20.6% CAGRs over the past three years. MSFT's revenue is expected to increase 7.2% and 13% year-over-year in 2023 and 2024, respectively. Its EPS is expected to rise 3.7% and 17.1% year-over-year in 2023 and 2024, respectively. Also, its EPS is estimated to grow 13% per annum for the next five years.

On the other hand, AMD's revenue and EPS have increased at 55.9% and 100.7% CAGRs respectively, over the past three years. Its revenue is expected to increase 43.2% and 6% year-over-year in 2022 and 2023, while its EPS is expected to increase 26.2% and 3.7% year-over-year for the same period, respectively.

Profitability

MSFT's gross profit margin of 68.26% is higher than AMD's 50.95%. Moreover, its EBITDA and net income margins of 48.67% and 34.37% compared with AMD's 24.30% and 9.96%, respectively.

In addition, MSFT's ROE, ROA, and ROTC of 42.88%, 19.81%, and 21.97% are higher than AMD's 7.37%, 2.26%, and 5.72%, respectively.

Thus, MSFT is more profitable.

Valuation

In terms of forward EV/Sales, MSFT's 8.21x is higher than AMD's 4.31x, while its forward EV/EBITDA of 17.04x is 32.9% higher than AMD's 12.82x. However, MSFT's forward P/E of 25.01x is 49.4% lower than AMD's 49.43x.

POWR Ratings

MSFT has an overall rating of B, equating to Buy in our proprietary POWR Ratings system. On the other hand, AMD has an overall rating of D, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

MSFT has a B grade for Quality. Its trailing-12-month CAPEX/Sales of 12.00% is 380.6% higher than the industry average of 2.50%. On the other hand, AMD has a D grade for Quality. Its trailing-12-month CAPEX/Sales of 1.80% is lower than the industry average.

In addition, MSFT has a B grade for Stability, in sync with its beta of 0.93, while AMD has an F grade for Stability, in sync with its beta of 2.00.

Of the 53-stock Software – Business industry, MSFT is ranked #9. AMD is ranked #89 out of 92 stocks in the Semiconductor & Wireless Chip industry.

Beyond what we've stated above, we have also rated the stocks for Growth, Value, Momentum, and Sentiment. Click here to view MSFT Ratings. Get all AMD ratings here.

The Winner

Despite lingering headwinds, the near-term economic outlook is improving, which should boost big-name stocks MSFT and AMD. However, MSFT's solid financials and robust profitability make it a better buy than AMD.

Our research shows that 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 Software – Business industry here and the Semiconductor & Wireless Chip industry here.

MSFT shares rose $1.15 (+0.48%) in premarket trading Tuesday. Year-to-date, MSFT has declined -28.35%, versus a -18.07% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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