Microsoft vs Google: The Push Into A.I.

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Microsoft vs Google: The Push Into A.I.

Generally speaking, Microsoft has always been solid in terms of revenue, and crises don't seem to particularly affect the tech giant. This growth, spread across various segments, shows their remarkable resilience and adaptability. They seem unstoppable!

Microsoft’s revenue streams are diverse, and this balanced revenue distribution mitigates risks, which is essential in any well-balanced portfolio! But Microsoft is in fierce competition with other tech giants.

They’ve recently opened a new AI division in London, challenging Google DeepMind. Google’s response? Developing Gemini, a language learning model to compete with OpenAI’s ChatGPT.

As Microsoft and Google vie for top AI talent, they’re investing heavily to attract and retain the best minds. Because yes, this AI arms race is not just about technology but also about talent and infrastructure. Both companies are pouring resources into building state-of-the-art data centers, acquiring startups, and funding AI research.

 So, which one is making the stronger push, and which may make for a better long-term investment?

Read the full analysis below…

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RIIQ Top 10 Watchlist

Every month, we spotlight 10 stocks that we believe are the most promising. We’ll follow these stocks closely and provide you with updates on their performance, analyst signals, company health, latest news, and upcoming projects. You’ll get a monthly analysis of these stocks that, in our view, present interesting investment opportunities. Whether it’s due to potential undervaluation, a recent dip creating a buying opportunity, or the implementation of innovative new strategies, these stocks are carefully chosen for their long-term growth potential.

#3 On This Month’s List: Nividia (NVDA)

A global leader in graphic chips, Nvidia is a key player in AI, gaming, and high-performance computing. But why has Nvidia’s stock been on a wild ride this year? It’s all about the highs and lows of the tech market. Early in the year, Nvidia’s stock skyrocketed, thanks to their stellar financial performance—$61 billion in revenue and net profits jumping sixfold to nearly $30 billion, mostly fueled by the AI craze.

But recently, Nvidia’s stock took a hit, dropping 13% and wiping out $430 billion in market value…So, should you buy Nvidia now and keep following the recent trend? Learn more by subscribing to RIIQ Pro.

#6 On This Month’s List: Costco (COST)

Costco, the wholesale giant known for its competitive prices, is gearing up for more growth with a membership fee hike.

The least we can say is that Costco has been a star performer, with a stock rising nearly 1,700% since 2000. Recently, the company just announced an 8.3% membership fee increase, from $60 to $65 for regular members and $120 to $130 for executive members, directly boosting their operating income.

Recently, the company just announced an 8.3% membership fee increase, from $60 to $65 for regular members and $120 to $130 for executive members, directly boosting their operating income. Despite these positives, Costco stock is pricey with a P/E ratio of 50, well above its five-year average of 40. Most of all, historically, Costco’s stock has seen dips of 20% to 40% and the current pullback is about 8%, suggesting it might not be the ideal time to buy.

Even great companies can be bad investments if you pay too much, but a better buying opportunity might come with this solid company. Learn more by subscribing to RIIQ Pro.

#8 On This Month’s List is Marvell Technologies (MRVL)

Marvell, a leading player in semiconductor solutions, has been riding high on the wave of AI demand. In the past year, its data center segment—boosted by AI-related products—has seen sales soar by 87% year-over-year, reaching $816.4 million in Q1 fiscal 2025.

Each month, we’ll keep you updated on how the RIIQ Top 10 stocks are performing. With these updates, you’ll be well-informed and better prepared to make savvy investment decisions.

However, it's not all smooth sailing. Despite this surge, Marvell’s total revenue dropped 12% from $1.3 billion last year to $1.2 billion. So, why the dip? It’s partly due to slower growth in other business areas, even as the data center segment has become a major revenue driver.

What’s next for Marvell? Its long-term success will depend on leveraging its strategic shift towards AI-driven data center solutions, which has already shown promising growth despite broader market challenges. So Marvell’s data center segment could keep growing for years to come.

Is Marvell a good stock to buy now? With Wall Street giving it a “buy” rating and a median target price of $90, the stock looks promising. Given the potential for sustained demand in AI and improving margins, Marvell could be a solid long-term investment. Learn more via the full write-up by subscribing to RIIQ Pro.

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RIIQ Key Investing Insight

The Importance of Gross Margin Analysis

In reality, analyzing a company is far less complicated than it might first appear. With a bit of dedication, you can become well-acquainted with some fundamental and basic concepts, which are accessible to anyone who truly wants to achieve success in investing. There’s no need to get lost in mountains of complex data or get overwhelmed by intricate financial models. The key is to focus on a few critical indicators that can give you a clear and accurate picture of a company's financial health.

One of these crucial indicators is the gross margin. This metric is incredibly useful for quickly gauging a company's profitability, allowing you to determine whether it deserves your attention and, potentially, your investment. By examining the gross margin, you get a straightforward measure of the difference between the revenue generated from sales and the cost of goods sold.

In simpler terms: It helps you understand how much money the company retains after covering its production costs. This can give you valuable insights into how effectively a company is managing its production expenses and pricing strategies.

A simple window into efficiency

The gross margin is a key indicator that shows how efficiently a company produces its goods. It represents the percentage of revenue that exceeds the cost of goods sold (COGS). Simply put, it reveals how much profit a company makes after accounting for the direct costs associated with producing its products.

Let’s look at a straightforward example: if a company has a gross margin of 40%, it means that for every dollar of revenue, 40 cents is gross profit. This percentage is crucial because it reflects the company’s ability to manage its production costs and price its products appropriately. While gross margins vary by industry, a typical range is generally between 5% and 10%. However, some industries, such as software and pharmaceuticals, often display much higher margins due to their lower COGS.

To illustrate this point, let's look at the income statements of Microsoft and Walmart, two large companies with completely different activities and structural costs:

Microsoft:

Walmart:

If we compare these gross margins and calculate the gross margin ratio, for example, in June 2024, Microsoft will have a gross margin of 69%, while Walmart will have a gross margin of 25% (see formula below).

For this reason, it’s essential to understand average gross margins by sector before making any decisions! Different industries have varying cost structures and pricing dynamics, so what is considered a good margin in one sector might be average or poor in another. Understanding these nuances helps in making more informed and accurate assessments of a company’s financial health.

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The Push Into A.I.

Deep-Dive

Intro

Initially, we have to talk about Microsoft, because there are many, many changes that have happened recently and will happen in the future, which could potentially represent an opportunity for any investor!

Once again, we won’t drown you in complex math or take more than a few minutes of your time.

As we've said before on Raising Investor IQ, information is power. Before making any investment decision, you need to seek out the information you need to make an informed decision.

Now let’s dive in!

Just a quick reminder, what does Microsoft do?

Microsoft is a tech giant specializing in software, hardware, and cloud services. They’re known for Windows, Office, Azure, and much more. They sell their products through various channels, including direct sales, online platforms, and partnerships.

Microsoft’s reach is extensive. Windows operating system runs on billions of devices globally. Office Suite, with its essential tools, is a staple in both corporate environments and personal computing. Their cloud platform, Azure, competes with Amazon Web Services (AWS) for cloud supremacy, offering a range of services from computing power to AI and machine learning.

But Microsoft isn’t just about software. Their hardware ventures include the successful Surface line of tablets and laptops, and they’re a major player in the gaming industry with Xbox. The combination of these products and services creates a diversified revenue stream that helps Microsoft weather market fluctuations.

The Technological Powerhouse

By the way, now Microsoft isn't just about Windows and Office anymore. They’ve pushed boundaries in AI and cloud computing. Their Azure cloud platform and AI initiatives, like the partnership with OpenAI (even if they are concurrent on a certain extent), are game changers. By integrating advanced AI into their products, Microsoft makes cutting-edge technology accessible to all. It has become a cornerstone of Microsoft's growth strategy. Offering everything from virtual machines to complex AI algorithms, it’s the backbone for businesses transitioning to the cloud. It supports a variety of programming languages and frameworks, making it accessible to developers worldwide. The platform’s scalability ensures it can handle everything from small startups to large enterprises. 

Big Moves and Bigger Partnerships

As we said, the partnership with OpenAI is particularly exciting. Its mission to ensure artificial general intelligence benefits all of humanity aligns with Microsoft's goals. Through this collaboration, Microsoft has exclusive licensing rights to their models, allowing them to integrate these powerful AI tools into their own products. This includes incorporating AI into Office, making features like grammar checks, data analysis, and predictive text smarter and more intuitive. And trust me, that’s game changer for any office’s workers!

Another standout partnership is with Hitachi Ltd. They’re working together on AI to optimize operational efficiency, boost customer service, and enhance predictive maintenance. This partnership is a win-win, driving innovation and revenue growth for Hitachi while showcasing Microsoft's AI capabilities. This global leader in engineering and electronics benefits from Microsoft's AI to streamline operations and reduce costs, for example with predictive maintenance that uses AI to anticipate equipment failures before they happen. This particular partnership not only drives technological advancement but also sets a benchmark for how AI can be effectively deployed in large-scale industrial applications.

Microsoft also partners with companies like Insight and ServiceNow to deepen cloud and AI integration. Insight is a leading provider of intelligent technology solutions, and their collaboration with Microsoft enhances digital transformation initiatives across various industries. ServiceNow, known for its workflow automation software, integrates with Microsoft Azure to offer seamless cloud services and AI-driven solutions.

Platforms like Copilot and GitHub Copilot, powered by Azure OpenAI Service, cater to diverse client needs, from data exploration to advanced insights. Copilot, integrated into Microsoft's Office Suite, assists users by providing smart suggestions, automating repetitive tasks, and offering advanced data analysis. GitHub Copilot, on the other hand, is a game-changer for developers. It suggests code snippets and helps with coding tasks, significantly boosting productivity and reducing development time.

As you can see, everyone has understood the importance of AI, and the thing now is to stay in the race, and one way of doing this is to partner with AI leaders like Microsoft!

The Investment Opportunity

Now that we've got the big picture out of the way, let's talk about what really interests us: why should we consider investing in Microsoft?

First and foremost, it’s their ability to blend tech innovation with solid financial performance. In 2023, Microsoft's sales have once again risen to pass the $200 billion mark:

Generally speaking, Microsoft has always been solid in terms of revenue, and crises don't seem to particularly affect the tech giant.

This growth, spread across various segments, shows their remarkable resilience and adaptability. They seem unstoppable!

As we said, Microsoft’s revenue streams are diverse, and this balanced revenue distribution mitigates risks, which is essential in any well-balanced portfolio! If one segment underperforms, the others can offset the impact, ensuring overall stability. Moreover, Microsoft's focus on subscription-based models, like Office 365 and Azure, provides recurring revenue, enhancing financial predictability and stability.

And sure, let’s talk about the company's valuation, which is currently 37 times earnings. That's relatively expensive, and higher than anything we've seen from Microsoft since 2000, but it's explained by the way Microsoft has established itself in the field of artificial intelligence. What's more, thanks to a solid portfolio of new products and services, Microsoft is poised to conquer new market share and continue its growth.

The company’s financial health is impeccable. They have a strong balance sheet with substantial cash reserves, low debt levels, and consistent cash flow generation. This financial strength allows Microsoft to invest in research and development, acquire strategic assets, and return value to shareholders through dividends and share buybacks.

About the Fierce Competition With Google

Microsoft is in fierce competition with other tech giants. They’ve recently opened a new AI division in London, challenging Google DeepMind. This move, led by former DeepMind researcher Jordan Huffman and overseen by DeepMind co-founder Mustafa Suleyman, underscores Microsoft’s commitment to AI leadership. They plan to invest over £2.5 billion in UK data centers, strengthening their presence and resources.

Google’s response? Developing Gemini, a language learning model to compete with OpenAI’s ChatGPT. As Microsoft and Google vie for top AI talent, they’re investing heavily to attract and retain the best minds. Because yes, this AI arms race is not just about technology but also about talent and infrastructure. Both companies are pouring resources into building state-of-the-art data centers, acquiring startups, and funding AI research. Microsoft’s significant investments in data centers, particularly in the UK, demonstrate their commitment to expanding their AI capabilities and providing robust, scalable solutions to their clients.

And when it comes to investment decision, it can be hard to choose between these two giants, since we'd have almost nothing to reproach them for, while their revenues grow as the same path:

Also, let's take a look at the PE ratios. For reference, the Price-to-Earnings (P/E) ratio measures a stock's valuation by comparing its market price to its earnings per share, indicating how much investors are willing to pay for each dollar of profit. This indicator is key when it comes to analyzing a stock:

The Microsoft P/E ratio is higher than Google’s, here is how you can use this graph:

• Microsoft (MSFT): If you believe in Microsoft's continued growth in cloud computing, enterprise software, and other emerging technologies, the higher P/E ratio could be justified. However, be mindful of the valuation risk.

• Google (GOOGL): If you prefer a more conservative approach with a company that has a strong market presence and stable earnings, Google's lower P/E ratio might be more attractive. It offers potential for growth without the higher valuation risk.

Numbers Worth a Thousand Words

Let’s talk numbers. Microsoft’s capital expenditures are expected to reach over $60 billion next year, while Alphabet’s will surpass $50 billion. This massive investment in AI and cloud infrastructure highlights the significance of AI in their future strategies. By the way, companies like Nvidia, AMD, and Broadcom benefit from these investments, providing the hardware needed for AI advancements.

Microsoft's return on equity is impressive, currently at 37% and averaging near 30% over the past five years, well above the minimum threshold for an excellent business, and this indicates that Microsoft efficiently uses shareholders' equity to generate profits. Their return on assets is also strong at 20%, showing that management is effectively leveraging the company’s assets.

The profitability of Microsoft is also solid. They maintain high gross margins above 60% and a net income margin around 35%. This profitability is a testament to their efficient operations, but also strong brand and pricing power.

Further Emphasis on Microsoft’s Brand Power

Microsoft's brand power is undeniable. This non-financial side of companies is just as important to take into account in your investment decisions!

Windows is synonymous with personal computing, Office Suite is essential for productivity, and Xbox is a leading name in gaming. Azure has positioned itself as a top-tier cloud service provider, competing directly with AWS.

Their acquisition of LinkedIn bolstered their presence in professional networking, providing valuable data and connections that integrate seamlessly with their productivity tools.

Microsoft’s brand strength is not just about recognition but also trust and loyalty. Businesses and consumers alike rely on their products for daily operations, entertainment, and connectivity. This trust translates into sustained revenue and market share, reinforcing their competitive edge. This seems to be a real virtuous circle.

That said, Microsoft deserves further analysis. You’re now in a better position to dive deeper and decide how to proceed.

Good luck! And if you want more...

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