Currently, Microsoft(NASDAQ: MSFT) and Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) are members of an elite group of eight companies with trillion-dollar market values. But the stocks stand out because the 12-month price targets set by Wall Street imply no downside. In other words, not even the most bearish analyst expects shares of Microsoft or Alphabet to decline over the next year.
- Among the 58 analysts following Microsoft, the low price target is $448 per share. That forecast implies 5% upside from its current price of $425. The median price target implies 18% upside.
- Among the 68 analysts following Alphabet, the low price target is $170 per share. That forecast implies 5% upside from its current share price of $162. The median price target implies 26% upside.
As a caveat, there is no such thing as a sure thing where the stock market is concerned. It is entirely possible that both stocks decline over the next year, but Wall Street's optimism is noteworthy. Here's what investors should know about Microsoft and Alphabet.
1. Microsoft
Microsoft is the largest enterprise software company and the second-largest public cloud in the world. It has introduced artificial intelligence (AI) products in both areas, such as Copilots and autonomous agents for its office productivity (Microsoft 365) and enterprise resource planning (Dynamics 365) platforms. Think of Copilots as personal assistants, and autonomous agents as AI applications.
Those products could become a material source of revenue in the future. Indeed, Morgan Stanley analysts believe they will help Microsoft extend its dominance in the enterprise software market.
Microsoft 365 Copilot entered general availability less than one year ago, and already 60% of Fortune 500 companies have adopted the product to some degree, and the number of daily users nearly doubled in the most recent quarter.
Meanwhile, Microsoft Azure is gaining share in cloud infrastructure and platform services, and its partnership with OpenAI has been an important selling point. Azure customers can customize OpenAI models, including the large language models that power ChatGPT, for the purpose of building generative AI applications tailored to their business needs.
Microsoft delivered a reasonable financial performance in the fourth quarter of fiscal 2024 (ended June 30). Revenue rose 15% to $64.7 billion, and earnings under generally accepted accounting principles (GAAP) jumped 10% to $2.95 per diluted share. The discrepancy between the top and bottom lines can be explained by the Activision acquisition, which added about 3 points to revenue growth and subtracted 2 points from earnings growth.
Looking ahead, Microsoft is one of the companies best positioned to monetize generative AI due to the reach of its software and cloud computing businesses. But Wall Street expects earnings to increase at 11% over the next 12 months. That makes the current valuation of 36 times earnings look expensive. Personally, I would wait for a cheaper price before purchasing shares of this stock.
2. Alphabet
Alphabet is the largest digital advertising company and third-largest public cloud in the world. Analysts have recognized its leadership in several AI product categories, including AI infrastructure solutions, machine learning platforms, and foundational large language models. The company is bringing that AI expertise to bear across its advertising and cloud computing segments to boost revenue.
Its dominance in digital advertising is a product of its ability to engage users and source data. For instance, Google Search users run 5.9 million searches per minute. Alphabet can use that information to help advertisers reach the right consumers with relevant content.
The company has also been layering new AI features into its ad tech software to streamline workflows and boost clicks, and it added generative AI overviews in Google Search to boost engagement.
Regarding Google Cloud, Forrester Research analysts recently wrote, "Google has enough differentiation in AI from other hyperscalers that enterprises may decide to migrate from their existing hyperscaler to Google or at least start a new relationship with Google Cloud."
Indeed, while the company still trails Amazon and Microsoft in the cloud infrastructure and platform services market, its share increased by a percentage point in the second quarter.
Alphabet reported encouraging financial results in the second quarter. Revenue rose 14% to $84.7 billion on strong sales growth in the cloud computing unit, alongside modest sales growth in the advertising segment. Meanwhile, GAAP earnings increased 31% to $1.89 per diluted share. Importantly, net profit margin expanded 325 basis points, driven by what chief financial officer Ruth Porat called "efforts to durably reengineer our cost base."
Wall Street expects Alphabet's earnings to increase 15.5% over the next 12 months. That consensus estimate makes the current valuation of 23.5 times earnings look reasonable. Patient investors should feel comfortable buying a small position in this AI stock today.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
