Certain Wall Street analysts expect Alphabet (GOOGL 0.49%) (GOOG 0.51%) and Microsoft (MSFT +0.33%) to achieve market values above $5 trillion in the next year. Here are the details.
- Brian Nowak at Morgan Stanley has set Alphabet's bull case target price at $415 per share. That implies 35% upside from its current share price of $307. It also implies a market value of $5 trillion.
- Michael Turrin at Wells Fargo has set Microsoft's target price at $700 per share. That implies 47% upside from the current share price of $475. It also implies a market value of $5.1 trillion.
Here's what investors should know about these artificial intelligence stocks.
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1. Alphabet
Alphabet is the largest adtech company in the world due to its ability to engage internet users and source consumer data through Google Search and YouTube. Search advertising is a particularly important source of revenue, and investors have been worried that generative artificial intelligence (AI) tools like ChatGPT and Perplexity may dethrone Alphabet.
However, Alphabet is successfully adapting to the changing landscape with its own generative AI features like AI Overviews and AI Mode. CEO Satya Nadella says those innovations have led to higher query volumes. Alphabet's new Gemini application recently reached 650 million monthly users. Gemini does not include ads yet, but the company has that option.
Meanwhile, Alphabet's Google Cloud is the third largest public cloud by infrastructure and platform services sales, and the company is gradually gaining market share (1 percentage point year to date) due to strength in artificial intelligence. Industry analysts have ranked Google as a leader in large language models, AI developer platforms, and conversational AI platforms.
Alphabet reported encouraging third-quarter financial results, beating estimates on the top and bottom lines. Revenue increased 16% to $102 billion, an acceleration from 15% growth in the same period last year. Earnings according to generally accepted accounting principles (GAAP) increased 35% to $2.87 per diluted share. CFO Anat Ashkenazi specifically mentioned strong demand for AI infrastructure, stressing adoption of custom chips and Gemini models.
Wall Street estimates Alphabet's earnings will increase at 8% annually through 2026. That makes the current valuation of 30 times earnings look expensive. But Alphabet topped the consensus estimate by an average of 14% in the last six quarters. I think the company will continue to beat expectations as it leans into AI across its adtech and cloud businesses. In that scenario, I think Alphabet can achieve a $5 trillion market cap in 2026.
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Key Data Points
2. Microsoft
Microsoft is the largest enterprise software company in the world. While best known for its office productivity suite, the company also has a strong position in other verticals, including business intelligence, cybersecurity, and enterprise resource planning. Microsoft is exploiting its dominance in software to monetize artificial intelligence.
The company has developed generative AI copilots that automate tasks within many of its software products. Microsoft 365 Copilot is the most popular, but the company has added conversational agents to other platforms. In total, its family of copilot applications had over 150 million monthly active users in the September-ended quarter, up from 100 million in the June-ended quarter, according to CEO Satya Nadella.
Meanwhile, Microsoft Azure is the second largest public cloud and it added a percentage point of market share in the past year despite being capacity constrained with respect to artificial intelligence infrastructure. Azure will "roughly double" its data center footprint in the next two years, which should lead to continued share gains and a possible acceleration in sales growth within the cloud computing unit.
Microsoft reported encouraging financial results in the September-ended quarter, exceeding Wall Street's consensus estimates on the top and bottom lines. Revenue increased 18% to $78 billion due to particularly strong sales growth in the cloud segment. Meanwhile, operating margin expanded 2 percentage points, and non-GAAP (adjusted) earnings increased 23% to $4.13 per diluted share.
Wall Street estimates Microsoft's adjusted earnings will increase at 16% annually through fiscal 2027 (ends in June). That makes the current valuation of 32 times earnings look tolerable, especially when the company beat the consensus estimate by an average of 6% in the last six quarters. I think Microsoft will achieve a $5 trillion market value next year if it continues to show momentum with artificial intelligence products.
