“For strangers and arrangers, constant change is here to stay.”
Neil Peart wrote so more than 40 years ago in Digital Man, and his lyrics ring truer than ever in today's digital world. We live in a digital age, and the innovators, individuals, and companies who can best develop and manage the relentless pace of technological change will shape tomorrow.
Today, the world's leading technology companies are at the forefront of these changes. These companies will shape the future with new production modes for semiconductor chips that enable AI technologies and applications, or all of the above. And as these companies succeed, smart investors can ride on that success. The key is finding great tech stocks to buy amidst a sea of strong candidates.
Morgan Stanley equity analysts know this. They took a deep dive into the details of two technology leaders: Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC). These companies come from different ends of the technology world. They approach it in different ways, each bringing unique talents and strengths to the future of technology. But it's clear one is the better buy for investors right now, and Morgan Stanley's analysts will help sort that out. So let's see what they discovered.
microsoft
Microsoft's success in establishing itself as a leading source for PC operating systems and office software has led to the company's success, but the magnitude of its success has given it an advantage. Microsoft is often classified as one of the “Magnificent 7” large-cap tech stocks that drove the market's rise last year. The company has a market capitalization of $3.07 trillion, making it the largest publicly traded company on Wall Street.
Microsoft's growth in recent years has been driven by much more than traditional software and computer solutions. AI and cloud computing are establishing themselves as the technologies driving the next wave of technological change, and Microsoft has established itself as a leader in both areas.
The company was an early backer of OpenAI, the development company that launched the current wave of AI with the release of ChatGPT in late 2022. Microsoft's investment in his OpenAI now exceeds $10 billion, giving it access to integrated top-end generative AI technologies. You have access to the search engine Bing and both Windows and Office software packages. Microsoft has also developed a generative AI-based online assistant called Copilot, which was released with recent Windows and Office software updates.
Microsoft is also working to incorporate AI technology into its cloud computing platform, Azure. Azure is already popular and a key revenue driver for Microsoft through its subscription services. Paid users have access to over 200 cloud-based software tools and services, many of which will soon have AI-based upgrades as an added value.
In raw numbers, Microsoft generated $211 billion in total revenue in its last fiscal year, 2023. The company's latest financial release covers the second quarter of his fiscal year 2024, with sales totaling $62 billion, $890 million more than expected and a slight increase. 18% compared to the previous year. Of the quarter's total revenue, intelligent cloud, which includes Azure, generated $25.9 billion, an increase of 19% year over year. Microsoft delivered quarterly earnings of $2.93 per share, beating estimates by 16 cents.
In his coverage of Microsoft at Morgan Stanley, 5-star analyst Keith Weiss is impressed by both the company's strong cloud position and ability to generate solid growth numbers.
“We expect Microsoft's leadership position in multiple long-term growth trends to translate into 14% revenue CAGR and 16% EPS CAGR by FY29. Over the past few years, Microsoft's improved public cloud positioning We've seen Microsoft's commercial revenue gain a 3.5 percentage point share within IDC's overall software market forecast over the past five years. As we outlined in our public cloud details, Azure's strong positioning for enterprise PaaS workloads should enable us to lead the market in public cloud by 2032. The forecast assumes that Microsoft's early leadership position in Generative AI will further exacerbate these share gains, allowing for an additional 3.5 percentage points increase by 2027 and FY29. 14% revenue CAGR over the five-year period,” Weiss said.
Consolidating these thoughts into a simple recommendation, the top analyst gives the MSFT stock an Overweight (i.e. Buy) rating, a $520 price target, and approximately 26% one-year upside potential. It suggests something. (Click here to see Weiss' track record)
Overall, Microsoft has received 35 recent recommendations from Street analysts, with the bulls clearly having the upper hand. The rating includes 33 buys, 1 hold, and 1 sell, with him as a strong buy consensus. The stock is selling for $413.64, and the average price target of $474.08 suggests an upside of ~15% over the next year. (look MSFT stock price prediction)
intel
Next, let's take a look at Intel, a major player in the semiconductor chip industry. Everyone knows it as the maker of processor chips for desktop and laptop computers. The company's leading position in the PC processor chip market is a source of its strength, and has helped the chip company maintain a solid market niche for more than a decade. Intel still holds a firm lead in the CPU market, with around 63% market share and a market capitalization of $154.5 billion.
In a significant development for the company, Intel has recently begun moving to establish itself as a foundry player in the US market. The move is in line with the US government's policy to bring semiconductor chip manufacturing back to US soil. Intel will receive up to $8.5 billion in federal spending under his CHIPS Act and will also have access to his $11 billion federally funded loan funds. The company has already announced plans to open a chip factory in New Mexico and is already making plans to optimize the new facility for manufacturing AI-enabled chips.
In a related announcement that represents a real win for Intel, the company unveiled an agreement with Microsoft that will see Intel use its new factory to make AI chips for the software giant. The two companies will collaborate on chip design, and the chips will be produced on Intel's 18A process. The partnership with Microsoft is a strong step toward Intel's goal of becoming the world's second-largest chip foundry by 2030.
Intel isn't just resting on its foundry plans. The company has also entered directly into his world of AI, releasing new AI-enabled chips to the market. Intel has several new product lines targeting the AI market, including 5th generation Xeon server chips and his Gaudi3 processors. At the same time, it hasn't abandoned its traditional efforts in CPUs and is also releasing new Core processors for the PC market.
On the financial front, Intel's fourth quarter 2023 revenue was $15.4 billion, beating expectations by $230 million and increasing 10% year-over-year. Non-GAAP EPS for the quarter was 54 cents per share, beating expectations by 9 cents.
Morgan Stanley five-star analyst Joseph Moore praised Intel's pivot to AI and foundry efforts. However, he cautioned that the large capital expenditures required for these operations could impact short-term cash flow.
“While we applaud Mr. Gelsinger's ambitious turnaround plan and have discussed in the past that this is not a quick fix, we believe it is necessary to support new growth efforts. CapEx plans eliminate ex-dividend cash flow, although downside is expected to be limited in the short term due to PC recovery, AI pipeline growth, and increased foundry enthusiasm. “To be more constructive, we need to see evidence that Intel can regain leadership in server performance,” Moore said.
As a result of these comments, Moore rates INTC an equal weight (i.e., Neutral), while his $48 price target suggests a 32% upside over the next 12 months. (Click here to see Moore's track record)
Morgan Stanley's view here is generally consistent with the street. INTC stock has a consensus rating of Hold based on 33 recent analyst reviews with a breakdown of 5 Buys, 24 Holds, and 4 Sells. The stock is trading at $36.31, and the average price target of $45.05 suggests the stock will rise 24% this year. (look INTC stock price prediction)
Morgan Stanley's view is clear. Both of these tech stocks are promising, but Microsoft is the better tech stock to buy.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. Content is for informational purposes only. It is very important to perform your own analysis before making any investment.
