“‘Cause for strangers and arrangers, constant change is here to stay.”
So wrote Neil Peart more than 40 years ago, in ‘Digital Man’, and his lyric rings more true than ever in today’s digital world. We’re living in a digital age, and the innovators, individuals, or corporations that can best develop and manage the constant pace of technological change will be the ones to set the shape of tomorrow.
Right now, some of the world’s leading tech companies are at the forefront of those changes. These are the companies that will shape the future using AI technologies and applications, or new modes of production for the semiconductor chips that make all of it possible – and as these companies succeed, smart investors can ride their success. The key will be finding the superior tech stock to buy, amid the crowd of likely contenders.
The stock analysts at Morgan Stanley know this. They’ve taken a deep dive into the details of Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC), two tech leaders. These companies come from different ends of the tech world; they approach it in different ways, and each brings its own set of talents and strengths to bear on the future of technology. But one is clearly the better buy for investors right now, and Morgan Stanley’s analysts can help us to sort that out. So let’s take a look at what they’ve found.
Microsoft
While Microsoft’s success in setting itself up as the leading source for PC operating systems, and for office software, has brought it success, the magnitude of its success has brought it dominance. Microsoft is often grouped among the ‘Magnificent 7,’ the mega-cap tech stocks that drove the market gains last year. With its market cap of $3.07 trillion, the company is the largest publicly traded firm on Wall Street.
In recent years, Microsoft’s growth has found support in more than just its traditional software and computer solutions. AI and cloud computing have established themselves as the technologies that will drive the next wave of tech changes, and Microsoft has positioned itself as a leader in both fields.
The company was an early backer of OpenAI, the development firm that launched the current AI wave with its ChatGPT release in late 2022. Microsoft’s investment in OpenAI now exceeds $10 billion, giving it access to top-end generative AI technology, which has been integrated into its search engine, Bing, and into both the Windows and Office software packages. Microsoft has also developed a generative AI-based online assistant, dubbed Copilot, which has been released with recent Windows and Office software updates.
Microsoft is also working to incorporate AI tech into its cloud computing platform, Azure. Azure has already become popular and is an important revenue driver for Microsoft through its subscription services. Paying users can access more than 200 cloud-based software tools and services, many of which will soon feature AI-based upgrades as added value.
In raw numbers, Microsoft generated $211 billion in total revenue during its last fiscal year, 2023. The company’s most recent financial release covered fiscal Q2 2024 and showed a total of $62 billion at the top line, $890 million better than the forecast and up some 18% year-over-year. Of that quarterly revenue total, the Intelligent Cloud, which includes Azure, generated $25.9 billion, representing a 19% year-over-year gain. Microsoft realized quarterly earnings of $2.93 per share, 16 cents ahead of the estimates.
In his coverage of Microsoft for Morgan Stanley, 5-star analyst Keith Weiss is impressed by both the company’s strong cloud position and its ability to generate solid growth numbers.
“We expect Microsoft’s leadership position for multiple secular growth trends to translate into a 14% revenue CAGR and 16% EPS CAGR through FY29. Over the past several years, we’ve seen Microsoft’s improving positioning for Public Cloud drive increasing share of the overall IT wallet, as evidenced in Microsoft Commercial revenues gaining 3.5% points of share within IDC’s overall software market estimates over the past 5 years. As we outlined in our Public Cloud deep-dive, stronger positioning for Enterprise PaaS workloads should enable Azure to take the market share lead in Public Cloud by 2032. Going forward, our forecast assumes Microsoft’s early leadership position within Generative AI further compounds these share gains, enabling another 3.5% points gain through 2027, and buttressing our 14% 5-year revenue CAGR through FY29,” Weiss opined.
Putting these thoughts into a simple recommendation, the top-rated analyst gives MSFT shares an Overweight (i.e. Buy) rating, with a $520 price target that suggests a one-year upside potential of ~26%. (To watch Weiss’s track record, click here)
Overall, Microsoft has picked up 35 recent recommendations from the Street’s analysts, and the bulls are clearly ascendant; the ratings include 33 Buys, 1 Hold, and 1 Sell for a Strong Buy consensus. The stock is selling for $413.64 and its $474.08 average target price implies it will gain ~15% heading out to the one-year horizon. (See MSFT stock forecast)
Intel
Next up, we’ll look at Intel, a major name in the semiconductor chip industry. We all recognize it as the maker of the processor chips in our desktop and laptop computers. Its leading position in the market for PC processor chips is the source of its strength, and solid niche that the chip company has held onto firmly for a decade or more. Intel still holds a solid lead in the CPU market, with a market share of approximately 63%, and it boasts a market cap of $154.5 billion.
In an important corporate development, Intel recently started moving to establish itself as a foundry player in the US market. The move is in-line with US government policy, to re-shore semiconductor chip manufacturing back to the continental US. Intel is in line to receive as much as $8.5 billion in Federal disbursement funds under the CHIPS Act, and will also be able to tap into $11 billion in Federally funded loan money. The company has already published plans to establish a chip factory in New Mexico, and is already making plans to optimize the new facility for the manufacture of AI-capable chips.
In a related announcement, that represents a substantial win for Intel, the company has revealed an agreement with Microsoft, whereby Intel will use its new factory to manufacture AI chips for the software giant. The firms will collaborate on chip design, with the chips to be produced on Intel’s 18A process. The Microsoft deal is a strong step toward Intel achieving its goal of becoming the second largest chip foundry on the global scene by 2030.
Intel isn’t just resting on its foundry plans. The company is also moving directly into the AI world, releasing new AI-capable chips onto the market. Intel has several new product lines, including the fifth-gen Xeon server chips and the Gaudi3 processors, that are aimed at the AI market. At the same time, it has not abandoned its traditional work in CPUs, and is also releasing new Core processors for the PC market.
On the financial side, Intel’s 4Q23 top line came to $15.4 billion, a result that was $230 million over the forecast and up 10% from the prior-year period. The non-GAAP EPS for the quarter, at 54 cents per share, was 9 cents above the forecast.
Joseph Moore, a 5-star analyst at Morgan Stanley, applauds Intel’s pivot towards AI and foundry initiatives. However, he cautions that the substantial capital spending required for these ventures could impact short-term cash flow.
“While we admire Gelsinger’s ambitious turnaround plan, and have discussed in the past that it is not a quick fix, the capital spending plan required to support new growth initiatives eliminates ex-dividend cash flow. With a PC recovery, growing AI pipeline, and building foundry enthusiasm in the short term we see limited downside, but need to see evidence that Intel can regain performance leadership in servers to be more constructive,” Moore opined.
These comments lead Moore to rate INTC as Equal-weight (i.e. Neutral), while his price target of $48 implies a 32% price increase in the next 12 months. (To watch Moore’s track record, click here)
The Morgan Stanley view here is in-line with the Street generally; INTC shares get a Hold consensus rating based on 33 recent analyst reviews that break down to 5 Buys, 24 Holds, and 4 Sells. The shares are trading for $36.31 and their $45.05 average price target suggests the stock will gain 24% over the course of this year. (See INTC stock forecast)
The Morgan Stanely view is clear; both of these tech stocks have plenty going for them, but Microsoft is the superior tech stock to buy.
To find good ideas for tech stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
