These 2 equity giants look compelling at current levels

Recognizing the right stocks is a skill every investor needs to learn, and the sheer volume of market data, on major indexes, on individual stocks, on and from stock analysts, can present an intimidating barrier. Fortunately, there are tools to help. The Smart Score is a data collection and comparison tool from TipRanks, which uses an AI-powered algorithm to sort data about each stock based on a series of factors, 8 in all, known to strongly correlate with the future outperformance of the shares.

It all sounds like a mouthful, but it boils down to this: a sophisticated data tool that gives you a simple score, on a scale of 1 to 10, for judging a particular stock’s prospects. It puts the complex world of stock market data at your fingertips.

The Perfect 10, of course, is supposed to be a bright neon sign that leads investors to take a closer look and, at times, leads investors to stocks that have never lacked headline or attention. These are some of the giants of the market, stocks that are household names, feature trillion-dollar market caps, and boast Strong Buy consensus ratings from top professional Street analysts. So, let’s take a closer look at two of them.

Microsoft Corporation (MSFT)

First on our list is Microsoft, one of the best known brands in the world and also the second largest publicly traded company in the world, with a market capitalization of $1.78 trillion. Microsoft got its start in the mid-1970s and was part of the initial expansion of the personal computer technology revolution. The company rose to prominence when its Windows operating system became the industry standard, still used today, for most personal computers.

Today, the company is successfully adapting to the growing cloud computing environment, offering products such as Office 365, which brings Office applications for home, school and small business use to the cloud; Dynamics 365, which does the same for business applications; and the Azure platform to support cloud computing operations. At the same time, the company maintains service and support for its most modern Windows operating systems.

In the most recently reported quarter, the first quarter of fiscal 2023 (September quarter), Microsoft reported $50.1 billion at the top. This translated to a 10% year over year increase and exceeded the forecast by $49.6 billion. The solid result came on the back of a 24% increase in cloud revenues, to $25.7 billion, or just over half of the total.

On the downside, the company reported a year-over-year drop in net income, 14% to $17.6 billion, with diluted EPS down 13% to $2.35 per share. The real kicker for investors came from the company’s second-quarter fiscal guidance, which was pegged at between $52.35 billion and $53.35 billion, or a 2% increase in the middle. This was, however, below the $56.05 billion analysts would have liked to see, and the stock fell following the earnings release.

Morgan Stanley’s Keith Weiss, however, remains optimistic about the company’s prospects. The 5-Star analyst writes: “While investors are concerned that future numbers have not been de-risk, we see a strong (and enduring) demand signal in commercial businesses, which should lead to improved revenues and growth in business. ‘EPS in 2H23…. The strength of Microsoft’s positioning in key secular growth segments remains unchanged. The mix shift toward faster growth of Azure and Dynamics 365 and relatively sustained growth of Office 365 (in constant currency) help support management’s goal of 20% constant currency growth across all of its businesses.”

According to Weiss, Microsoft’s potential fully deserves its Overweight (Buy) rating, and its $307 price target implies a 29% one-year upside potential. (To look at Weiss’ track record, click here)

Overall, Microsoft stock has garnered 27 recent ratings from Wall Street analysts, a total that includes 25 buys versus just 2 holds, for a Strong Buy consensus rating. The shares are priced at $238.73 and their average target of $291.34 suggests a 22% gain over the one-year time horizon. (See MSFT stock analysis on TipRanks)

Alphabet, Inc. (GOOGL)

Next is Alphabet, the parent company of Google, which everyone knows. The world’s largest search engine is part of a combined company that boasts a market capitalization of $1.16 trillion, making it the third largest publicly traded company, after Microsoft and Apple. Alphabet isn’t just Google; the company also owns the Android operating system, popular website YouTube, and is even moving into the autonomous vehicle niche through its Waymo subsidiary.

While Alphabet remains at the top of the global tech industry, the recent 3Q22 showed some cracks that will need to be addressed. For the most part, these are related to general economic conditions, especially shrinking advertising budgets in the online sector. The company’s third-quarter results showed total revenue of $69.09 billion, up 6% year over year, but that modest growth represents a sharp deceleration from a year-ago growth rate of 41%. and missed the forecast by $70.5 billion. Operating margins have also declined, from 32% a year ago to 25% in the recent quarter; operating profit fell 18% to $17.13 billion.

The lack of revenue has been exacerbated by a major lack in YouTube’s top line. Ad revenue on the video site was $7.07 billion, missing the $7.42 billion forecast by a 4.7% margin.

While there are serious headwinds for Alphabet/Google, we shouldn’t underestimate the company’s clear strengths. Google remains the Internet’s leading search engine, and Google Search accounted for more than $39.5 billion in total revenue. And, despite the decline in overall online advertising, Google Ads saw its absolute revenue numbers grow by $1.3 billion year-over-year, to $54.4 billion (a total that includes Google Search gain and advertising on YouTube). Finally, the company boasts deep pockets, with over $21.9 billion in cash on hand. In short, Alphabet has both the market position and resources to weather a storm.

Evercore ISI 5-star analyst Mark Mahaney is aware of GOOGL’s difficulties in the online ad segment going forward. However, while he expects short-term pain, he also sees long-term gain: “For now, we estimate GOOGL’s organic revenue growth to further deteriorate to 6%y/y in the fourth quarter, before starting to recover in ’23. But after Macro, FX and Comps, we strongly believe GOOGL will re-emerge as the largest and strongest global ad revenue platform, with a hugely profitable business model, significant diversification into Cloud Computing, and substantial long-term option value with Waymo .”

Quantifying its position on GOOGL, Mahaney rates it as an Outperform (a Buy) for the year ahead and backed by a $120 price target that implies 34% upside potential from current levels. (To look at Mahaney’s track record, click here)

All of Mahaney’s colleagues agree with his thesis. GOOGL stock earns a unanimous Strong Buy consensus rating, based on 29 recent positive analyst reviews. The stock’s average price target, $125.76, indicates potential for 41% growth from its current trading price of $89.23 over the next year. (See GOOGL stock analysis on TipRanks)

Keep up with the better than the TipRanks Smart Score has to offer.

Disclaimer: The views expressed in this article are solely those of the analysts featured. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

Leave a Reply

Your email address will not be published. Required fields are marked *