Google Vs. Microsoft: One Of These AI Champions Has 3X Better Return Potential

Summary:

  • ChatGPT has become the fastest-growing internet application in history, kicking off an AI hype cycle that has caused some investors to lose their minds.
  • Google’s 8% single-day crash wiped out $100 billion in value for a similar mistake that Microsoft Corporation’s own chat-bot powered Bing is also making right now.
  • Microsoft is spending a lot on AI, but Google is spending far more, and is expected to spend about $300 billion improving its AI tech through 2028.
  • Both Google and Microsoft are likely AI champions of the future who will use their respective technologies to cement their strong positions in cloud computing.
  • But one of these tech titans has superior valuation and a faster long-term growth rate that mean it offers 24% annual return potential over the next three years, 3X more than the other. Both are world-beater Ultra SWANs, but one is the clearly better buy today.

Low-angle shot of cheerful multi-ethnic employees celebrating victory and big profit

dikushin/iStock via Getty Images

This article was published on Dividend Kings on Thursday, February 16th, 2023.

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As hard as it is to believe that bubbles can form in a bear market, that’s what we’ve seen happen with artificial intelligence, or

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Ycharts

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WSJ

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Fortune

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Verge

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Statcounter

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FactSet Research Terminal

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FactSet Research Terminal

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Ycharts

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Statista

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IFI claims

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FAST Graphs, FactSet Research

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FactSet Research Terminal

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FactSet Research Terminal

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2022 $282,836 $60,010 $110,132 $74,842 $59,972
2023 $299,779 $74,122 $116,741 $78,261 $66,233
2024 $336,191 $87,733 $132,525 $91,494 $77,475
2025 $372,657 $104,146 $155,636 $106,162 $89,814
2026 $407,160 $127,388 $167,736 $118,378 $100,556
2027 $437,107 $145,624 $183,292 $130,859 $112,005
2028 $452,574 $162,182 $196,999 $139,601 $122,055
Annualized Growth 2022-2028 8.15% 18.02% 10.18% 10.95% 12.57%
Cumulative 2023-2028 $2,305,468 $701,195 $952,929 $664,755 $568,138

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2022 $198,270 $65,149 $97,843 $83,383 $69,447
2023 $209,024 $61,924 $100,474 $85,262 $69,637
2024 $232,960 $75,258 $115,831 $98,028 $79,940
2025 $263,551 $90,914 $135,123 $113,542 $92,443
2026 $306,057 $104,867 $153,954 $133,016 $106,550
2027 $323,166 $119,878 $173,190 $138,270 $117,707
Annualized Growth 2022-2027 10.26% 12.97% 12.10% 10.64% 11.13%
Cumulative 2023-2027 $1,334,758 $452,841 $678,572 $568,118 $466,277

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(Source: FactSet Research)

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(Source: FactSet Research)

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return
Alphabet 0.0% 14.5% 14.5% 10.2%
ZEUS Income Growth (My family hedge fund) 4.1% 10.2% 14.3% 10.0%
Microsoft 1.0% 12.9% 13.9% 9.7%
Schwab US Dividend Equity ETF 3.6% 8.6% 12.2% 8.5%
Vanguard Dividend Appreciation ETF 2.2% 10.0% 12.2% 8.5%
Nasdaq 0.8% 10.9% 11.7% 8.2%
Dividend Aristocrats 1.9% 8.5% 10.4% 7.3%
S&P 500 1.7% 8.5% 10.2% 7.1%
REITs 3.9% 6.1% 10.0% 7.0%
60/40 Retirement Portfolio 2.1% 5.1% 7.2% 5.0%

Metric Historical Fair Value Multiples (all years) 2022 2023 2024 2025 2026 12-Month Forward Fair Value
Earnings 25.79 $117.60 $133.33 $159.38 $188.52 $216.38
Average $117.60 $133.33 $159.38 $188.52 $216.38 $136.84
Current Price $96.94

Discount To Fair Value

17.57% 27.30% 39.18% 48.58% 55.20% 29.16%
Upside To Fair Value 21.31% 37.54% 64.41% 94.48% 123.21% 41.16%
2023 EPS 2024 EPS 2023 Weighted EPS 2024 Weighted EPS 12-Month Forward PE 12-Month Average Fair Value Forward PE Current Forward PE

Current Forward Cash-Adjusted PE

$5.17 $6.18 $4.47 $0.83 $5.31 25.8 18.3 10.8

Metric Historical Fair Value Multiples (10-Years, Nadella Era, New Business Model) 2022 2023 2024 2025 2026

12-Month Forward Fair Value

Earnings 25.78 $239.24 $259.86 $302.40 $363.24 $410.42
Average $239.24 $259.86 $302.40 $363.24 $410.42 $265.59
Current Price $269.32

Discount To Fair Value

-12.57% -3.64% 10.94% 25.86% 34.38% -1.40%
Upside To Fair Value -11.17% -3.51% 12.28% 34.87% 52.39% -0.38%
2023 EPS 2024 EPS 2023 Weighted EPS 2024 Weighted EPS 12-Month Forward EPS 12-Month Average Fair Value Forward PE Current Forward PE

Current Forward Cash-Adjusted PE

$10.08 $11.73 $8.72 $1.58 $10.30 25.8 26.1 18.2

Classification S&P LT Risk-Management Global Percentile

Risk-Management Interpretation

Risk-Management Rating

BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL 100 Exceptional (Top 80 companies in the world) Very Low Risk
Microsoft 97

Exceptional

Very Low Risk

Alphabet 93

Exceptional

Very Low Risk

Strong ESG Stocks 86

Very Good

Very Low Risk

Foreign Dividend Stocks 77

Good, Bordering On Very Good

Low Risk

Ultra SWANs 74 Good Low Risk
Dividend Aristocrats 67 Above-Average (Bordering On Good) Low Risk
Low Volatility Stocks 65 Above-Average Low Risk
Master List average 61 Above-Average Low Risk
Dividend Kings 60 Above-Average Low Risk
Hyper-Growth stocks 59 Average, Bordering On Above-Average Medium Risk
Dividend Champions 55 Average Medium Risk
Monthly Dividend Stocks 41 Average Medium Risk

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(Source: FAST Graphs, FactSet)

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(Source: FAST Graphs, FactSet)


Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DK owns GOOG and MSFT in our portfolios.


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