MSFT vs ORCL: Which AI Software Stock Is a Better Buy?

The thunderous rally in artificial intelligence (AI) stocks has been hard to miss. With OpenAI’s ChatGPT gaining widespread acceptance, investors have flocked to stocks with exposure to the burgeoning AI market. As one of the main drivers of overall market action for the better part of the last two years, it’s fair to say that AI has truly arrived, and the topic of investing has become firmly entrenched in the minds and wallets of most market participants.

But with the AI ​​market, valued at around $621 billion in 2024, expected to grow at a CAGR of 20.4% between now and 2032 to reach a staggering $2.7 trillion, this trend still appears to be in its early stages. To best capitalize on the expected long-term growth in AI, investors should be wary of investing in questionable stocks of companies that are “AI pretenders” rather than true innovators working on and capitalizing on the technology, as the obvious parallels to the dot-com bubble at the turn of the millennium are hard to miss.

That’s where Microsoft (MSFT) and Oracle (ORCL) come in. After decades of existence and weathering several tough business cycles—including the aforementioned tech bubble—these two software giants are now at the forefront of the AI ​​revolution, albeit in different ways. With strong fundamentals and strong business prospects, both tech giants’ stocks have earned positive reviews from the analyst community and are expected to deliver above-average earnings growth. But which one is a better fit for your portfolio? Here’s a closer look at both.

Microsoft

Co-founded by Bill Gates almost five decades ago, Microsoft (MSFT) began as a small software startup and has now grown into a multinational technology company that develops, manufactures, licenses, supports, and sells computer software, consumer electronics, personal computers, and related services. Its key products have become household names over the years, including Windows, MS Office, Azure, and Xbox. The company has a whopping market capitalization of $3.08 trillion.

MSFT stock is up 10.6% year-over-year, and the company also offers a modest 0.72% dividend yield. The company has been raising dividends for 19 years, and with a payout ratio of just 25.4%, there is room for further growth.

Microsoft’s latest quarterly results were impressive, as the company’s fiscal fourth-quarter revenue and earnings beat consensus estimates. MSFT reported revenue of $64.7 billion in the fourth quarter, up 15.2% from a year earlier. A 31% year-over-year increase in services and other revenues drove the overall increase, as revenue from the products segment fell 21.6% during the same period.

EPS rose 10% year-over-year to $2.95, beating consensus estimates. Notably, this was the company’s eighth consecutive quarterly earnings increase. Overall, over the past 10 years, Microsoft’s revenue and EPS have achieved a CAGR of 10.94% and 14.85%, respectively.

Net cash provided by operating activities increased to $37.2 billion in the fourth quarter, compared to $28.8 billion in the prior year; the company ended the quarter with a cash balance of $18.3 billion.

When it comes to Microsoft’s AI capabilities, its multibillion-dollar investment in OpenAI’s ChatGPT is well-known. Additionally, the company spent $19 billion on AI capital expenditures in the fourth quarter.

In addition, Microsoft’s generative AI assistant, Copilot, is now integrated with various apps and platforms within its ecosystem, resulting in a 60% increase in customers per year. This demonstrates the quality and adoption of the product.

Additionally, Azure AI customer base grew 60% year-over-year, and the cloud segment posted revenue of $28.5 billion (up 18.9% year-over-year). The company highlighted growth of $10 million and more than $100 million in Azure and Microsoft 365 contracts, indicating strong customer commitment to long-term AI-based contracts.

Analysts are forecasting MSFT’s revenue growth of 14.65% and earnings per share growth of 16.60%, compared to the sector medians of 6.47% and 6.98%, respectively.

Overall, analysts have rated the stock as a “Strong Buy” with an average price target of $499.58, implying an upside potential of around 20% from current levels. Out of the 39 analysts covering the stock, 35 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 1 has a “Hold” rating.

Oracle

Founded in 1977 and headquartered in Austin, Oracle (ORCL) is a multinational computer technology corporation specializing in enterprise software, cloud computing systems, and computer hardware. The company’s primary offerings are software licensing, cloud services, and hardware sales. ORCL currently has a market capitalization of $380.5 billion.

Oracle’s stock price is up about 31.9% YTD, beating the broader stock market, and it also offers a dividend yield of 1.16%, backed by 9 years of consistent growth. With a modest payout ratio of just 28.73%, Oracle has room to continue raising dividends in the coming years.

However, Oracle’s results for the latest quarter were not up to par, as revenue and earnings for the fiscal fourth quarter fell short of expectations. However, revenue rose 3.3% from a year earlier to $14.3 billion, and the cloud services business grew 9.2% in the same period to $10.2 billion.

Earnings per share fell 2.4% from a year earlier to $1.63, missing the consensus estimate of $1.65. It was the first time in seven quarters that Oracle’s earnings per share missed expectations.

Oracle generated $18.7 billion in net cash from operations in fiscal 2024, up from $17.2 billion in fiscal 2023, with free cash flow increasing to $11.8 billion from $8.5 billion in the prior year. Overall, the company ended the quarter with a cash balance of $10.4 billion. While that is significantly lower than its debt level of $86 billion, most of its debt is more than five years old.

Today, Oracle is driving AI innovation by training models directly on customer data, within its infrastructure. This improves privacy, security, and accuracy, eliminating the need to send sensitive information to the cloud. Its competitive advantage is that its cloud network is more agile than its peers, leading to lower costs for customers. This has led to “the most successful and experienced AI companies in the world using Oracle’s cloud services and data centers,” according to CEO Safra Catz.

Oracle has also landed several key customers, including a $10 billion cloud contract from Elon Musk’s xAI startup. Musk is reportedly looking to lease Oracle’s cloud servers for several years. Oracle also recently struck a deal with data analytics company Palantir (PLTR) to offer AI solutions to governments and enterprises. What’s more, it signed a deal with OpenAI in early June, despite OpenAI’s close relationship with Microsoft and its existing use of Microsoft Azure to provide additional cloud capacity.

In addition, Oracle has integrated generative AI capabilities into its Fusion Cloud Applications Suite. This suite offers a comprehensive set of ERP, EPM, SCM, HCM, and Customer Experience tools built on the Oracle Cloud platform. The impact is clear, as Oracle has secured at least 40 new AI contracts worth $1 billion that have yet to be implemented, demonstrating the value proposition of this approach.

Analysts are forecasting ORCL to deliver solid earnings growth going forward. On average, forward EPS growth is expected to be 21.29%, well above the sector median of 6.98%. ORCL is currently valued at a lower price in terms of projected earnings growth, although its earnings per share are not in the same league as the $3 trillion giant Microsoft.

Overall, analysts have given ORCL stock a “Moderate Buy” rating, with an average price target of $149.64 – implying upside potential of about 7.5% from current levels. Of the 29 analysts covering the stock, 17 have rated it a “Strong Buy” and 12 have rated it a “Hold.”

On the date of publication, Pathikrit Bose did not hold (directly or indirectly) a position in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please refer to Barchart’s Disclosure Policy here.