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The tech-heavy Nasdaq and the S&P 500 dropped on Wednesday as Alphabet slumped after its cloud division missed revenue estimates, while other mega-cap stocks were also pressured by rising U.S. Treasury yields.
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The Nasdaq and the S&P 500 slipped on Wednesday as tech giant Alphabet slumped after its cloud division missed revenue estimates, while post-earnings gains in Microsoft and Boeing helped lift the Dow.
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Futures tracking the Nasdaq and the S&P 500 slipped on Wednesday as tech giant Alphabet slumped after its cloud division missed revenue estimates, while other mega-cap stocks also edged lower pressured by rising U.S. Treasury yields.
Tech titans Microsoft (
NASDAQ:MSFT
) and Alphabet (
NASDAQ:GOOGL
) reported their quarterly financial numbers on Tuesday. Thanks to the
AI (Artificial Intelligence) boost, Microsoft impressed investors with its performance in the cloud segment. However, Google’s AI initiatives are yet to provide a meaningful push to its cloud revenues, as the
segment disappointed with its Q3 performance. While MSFT edged past Google with its growth rate, one quarter’s performance is insufficient to judge which company has the upper hand in the cloud space.
Interestingly, it's not Microsoft or Google, but according to
Robert W. Baird analyst Colin Sebastian, Amazon (
NASDAQ:AMZN
) stands out as the top player in the Cloud segment.
In a note to investors dated October 24, Baird analyst highlighted that Amazon’s AWS (Amazon Web Services) remains the largest cloud provider. Notably, AMZN is scheduled to report its
Q3 earnings on October 26, and the analyst expects the AWS segment to register an increase of about 13% year-over-year, reflecting a slight improvement in growth rate on a sequential basis.
Coming back to Microsoft and Google, these companies are aggressively investing to scale their AI infrastructure and incorporate AI into their cloud products and segments. With this backdrop, let’s look at what the Street recommends for MSFT and GOOGL stocks.
What is the Forecast for Microsoft Stock?
Microsoft dedicated $11.2 billion to capital expenditure to grow its AI infrastructure and support cloud demand in the first quarter of Fiscal 2024. Moreover, Microsoft expects capital expenditure to increase sequentially, reflecting increased investments in the cloud and AI infrastructure.
Thanks to the increased investments and incorporation of AI, MSFT’s management expects Azure (its cloud platform) to deliver revenue growth of 26% to 27% in constant currency in Q2 FY24. Moreover, the Intelligent Cloud segment’s top line is projected to gain from increased GPU capacity and better-than-expected GPU utilization of MSFT’s AI services.
Given the lift from AI and strength in its Cloud business, Wall Street analysts maintain a bullish outlook on MSFT stock. With 32 Buys and four Holds, Microsoft stock has a Strong Buy consensus rating. Further, the
average MSFT stock price target of $401.19 implies 21.38% upside potential from current levels.
What is the Prediction for Alphabet Stock?
While AI is helping Microsoft offset the negative impact of spending optimization by enterprises, Alphabet’s cloud division has yet to recognize any such benefits. Nonetheless, the company is investing in its cloud platform to drive customer engagement and is integrating AI across its cloud products and services, which will lift the segment’s revenue.
Further, Google offers a unified platform to analyze structured and unstructured data and advanced AI-optimized infrastructure, which is driving more customers to its platform. Like MSFT, Alphabet plans to grow its investments to bring generative AI capabilities into its products and capitalize on the opportunities ahead.
In addition to the growth prospects in the cloud segment, the strength in the Search business and an expected reacceleration in ad spending augur well for the company. GOOGL stock sports a Strong Buy consensus rating, reflecting 28 Buys and five Holds. Further, the
average GOOGL stock price target of $152.37 implies 9.77% upside potential from current levels.
Bottom Line
Microsoft’s performance in the cloud segment was impressive in the most recent quarter, as the company is reaping the rewards of its AI initiatives. Meanwhile, Google's AI initiatives have yet to substantially boost its cloud revenue, but its ongoing investments and expanding AI capabilities bode well for its long-term growth.
Both MSFT and GOOGL stocks enjoy a Strong Buy consensus rating from analysts. Thus, drawing conclusions about which company has a competitive edge in the cloud space based on just one quarter's performance will be premature. That said, analysts’ average price target indicates that MSFT offers a higher upside potential from current levels.
Disclosure
Launched on 05/04/2005, the Invesco S&P 500 Top 50 ETF (XLG) is a passively managed exchange traded fund designed to provide a broad exposure to the Large Cap Blend segment of the US equity market.