Magnificent 7 stocks Alphabet (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) are having very different years. While the former’s up about 22% year to date, the latter’s down about 16%.
The question is – which is the better option to consider buying for an ISA today? Is it smarter to go for the high-flying Alphabet or the beaten-up Microsoft?
Which tech company’s performing better?
Both companies produced strong earnings reports earlier this week. However, Alphabet’s was the stronger of the two.
For the quarter, it posted:
- Total revenue of $109.9bn, up 22% (19% at constant currency).
- Cloud revenue of $20bn, up 63%.
- Earnings per share (EPS) of $5.11, up 82%.
One highlight of its results was that Gemini Enterprise saw 40% quarter-on-quarter growth in paid monthly active users. This shows institutions are increasingly using Alphabet’s AI services.
Turning to Microsoft, it posted:
- Revenue of $82.9bn, up 18% (15% in constant currency).
- Cloud revenue of $54.4bn, up 29%.
- EPS of $4.27, up 21%.
On the earnings call, CEO Satya Nadella said that Microsoft Copilot now has 20m paid enterprise seats. This suggests its AI services are gaining traction in the business world too.
Looking at the numbers, both companies are performing well. But it’s hard to ignore Alphabet’s cloud growth – it’s very impressive.
What do analysts like more?
After the earnings, Wall Street analysts have been scrambling to update their price targets for Alphabet. I counted increases from 23 different firms. The average price target of those firms is $427. That’s about 17% above the current share price.
Turning to Microsoft, the broker activity wasn’t as bullish. While some analysts raised their price targets, others reduced them. That said, the average price target here is still well above the current share price at $569 (about 40% above). So analysts remain very bullish in general.
Which stock’s cheaper?
Focusing on valuations, Microsoft is the clear winner here. After Alphabet’s recent rise, it’s now quite expensive – its forward-looking price-to-earnings (P/E) ratio is about 29.
Looking at Microsoft, it’s trading on a forward-looking P/E ratio of about 21 when we take the earnings forecast for the financial year ending 30 June 2027. So it’s far cheaper than its Mag 7 rival.
Which is riskier?
As for risks, both companies face them. For Alphabet, a major risk is a slowdown in advertising spending. From an investment perspective, the valuation’s also a risk – this doesn’t leave any room for a slowdown.
As for Microsoft, a key risk is white collar job losses – this could lead to less software license revenue. Another is the company’s exposure to OpenAI – ChatGPT’s losing market share to Gemini and Claude.
My call
Weighing all this up, it’s actually really hard to pick a winner. Alphabet has more momentum right now, both operationally and from a trading perspective, but Microsoft’s far cheaper.
Ultimately, I think the best stock to consider comes down to an individual’s investment approach. If more focused on momentum, Alphabet is in a strong uptrend. However, when more focused on value, Microsoft looks cheap.
