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Earnings season is nearly here, and investors are eager to learn how the big tech stocks are monetizing their artificial intelligence investments. Three prominent players with major AI initiatives are Microsoft (MSFT), Apple (AAPL) and Alphabet (GOOGL). Should one of these AI stocks get into your portfolio ahead of the next earnings release? Read on to find out.
The Current AI Landscape
In earlier years of artificial intelligence development, academia took the lead in developing machine learning models. That trend has shifted, according to the AI Index Report from Stanford University. In 2023, industry—including companies like Microsoft, Apple, and Alphabet—produced 51 notable machine learning models. Academic institutions created only 15.
This shift likely results from two factors:
- The costs of training an AI model now stretches up into the tens of millions, which goes beyond what academia can reasonably fund.
- The business case for making massive AI investments is gaining clarity. In a 2024 McKinsey survey, 39% of respondents saw lower costs resulting from AI adoption in their organization. Respondents represented various functional disciplines, including human resources and legal.
With AI producing measurable results in multiple business areas, adoption and demand of AI tools are poised to rise globally. That is a high-level justification to spend money developing more versatile, accurate and creative AI applications.
Because the costs of AI development are high, deep-pocketed AI players have an advantage in the AI race. Microsoft, Apple and Alphabet are among the largest public companies in the U.S. Each has the resources and global brand recognition to develop and monetize AI solutions to customers around the world.
Microsoft, Apple and Google At A Glance
The table below shows the market capitalization, dividend yield and trailing 12-month (TTM) EPS for Microsoft versus Apple stock and Google stock, officially known as Alphabet.
Date source: Morningstar.com, Marketbeat.com
If you are interested in dividend yields, you wouldn’t describe any of these as the best 2024 stocks. Investors don’t buy MSFT stock, Apple stock or Google stock for the cash income—the motivation is capital appreciation with some downside protection related to the size of these companies. Size creates access to capital and access to capital is an important life raft during hard times.
Microsoft Overview
Microsoft develops software for personal and business computing, maintains a platform for enterprise application development and sells the Xbox gaming console and related content. Microsoft also owns and runs the business networking website LinkedIn.
Microsoft’s AI Initiatives
Microsoft is building AI resources for its consumer and business customers. Products to watch include Copilot and Microsoft Cloud.
- Copilot is Microsoft’s AI assistant. The application has three tiers, ranging in price from free to $360 annually. Copilot can answer questions, write and summarize content, create images and more. With a paid subscription, Copilot integrates with Microsoft productivity software, including Word, Excel and Designer.
- Microsoft Cloud: Microsoft Cloud is a set of products and services that support the development and management of business applications, including AI and machine learning projects.
Financial Performance And Growth
In its third quarter fiscal year 2024 earnings release, Microsoft reported 17% revenue growth, 20% net income growth and 20% diluted EPS growth. Cloud computing services were big drivers of the topline growth. Cloud grew 23%, while Azure and other cloud services grew 31%.
MSFT stock is up 24% this year, after gaining 57% in 2023.
Apple Overview
Apple designs, makes and sells smartphones, tablets, smartwatches, laptops and personal computers. The company also runs the App Store, which distributes applications for its devices, sells cloud storage and operates the cashless payment service Apple Pay.
Apple’s AI Initiatives
Apple’s AI strategy centers on building powerful AI features into its devices. These features are collectively branded as Apple Intelligence. Apple Intelligence can write, create images, organize the email inbox, use applications and learn to simplify tasks based on user behavior. Apple has said this AI offering will safeguard user data better than other tools available.
Apple Intelligence will debut in 2024, but only newer devices will support it. The AI tools will initially be free, with monetization coming indirectly via device sales. Apple Insider reports that Apple Intelligence may at some point adopt a subscription model for advanced features.
Financial Performance and Growth
For the fiscal second quarter ended on May 2, 2024, Apple reported record Services revenue and an all-time high for active installed devices across all products and geographies. Sales fell 4.3% and net income dipped 2% versus the prior-year quarter. Diluted EPS increased by $0.01.
AAPL stock is up 21% in 2024, with growth following the May announcement of Apple Intelligence. Apple bounced back from a tough 2022 with 43% growth in 2023.
Alphabet Overview
Alphabet, formerly known as Google, runs Google Search, sells online advertising, maintains the Google Cloud computing platform, offers online storage and productivity software and manages the Google Play store. Alphabet also designs and sells Google Pixel smartphones.
Alphabet’s AI Initiatives
Alphabet’s AI roadmap puts the company in competition with OpenAI’s ChatGPT and chip designers Nvidia (NVDA) and Advanced Micro Devices (AMD). Key initiatives:
- Gemini: Gemini is Google’s AI assistant, which can answer questions, write text, summarize and analyze information, create images and more. Gemini powers search result summaries on Google Search and can also be accessed directly for user queries. Gemini Advanced, available via paid subscription, can tackle more complex tasks, such as writing code.
- Project Astra: Project Astra is currently a prototype. The tool can analyze images from a smartphone camera and share conclusions about the physical environment verbally.
- Tensor processing unit (TPU): Google will launch a new, more powerful TPU to its cloud customers later in 2024. The chip is positioned as a competitor to NVDA’s AI-capable chips.
Financial Performance And Growth
For the first quarter of 2024, Alphabet reported 16% sales growth in constant currency, 57% net income growth and 61% growth in diluted EPS. CEO Sundar Pichai cited strong performance from Search, Youtube and Cloud.
After a decline in the first two months of the year, Alphabet stock rebounded to 37% year-to-date growth. GOOGL was also up 58% in 2023.
Comparing Financial Metrics
The table below includes high-level income statement, balance sheet, cash flow and valuation metrics for Microsoft, Apple and Alphabet.
Data source: Morningstar.com
Over the last 12 months, Microsoft generated the lowest revenue but outperformed Alphabet on net income. All three companies produced operating cash flow in the range of $107 billion to $111 billion.
Alphabet has strong balance sheet characteristics, with lower debt and higher cash than the two competitors. Alphabet also has the lowest PE ratio of the three, while Microsoft has the highest.
Market Share And Growth Potential
Microsoft, Apple and Google are each approaching AI from slightly different angles:
- Microsoft is building AI into its popular software products and providing AI-related tools to business customers using Microsoft Cloud.
- Apple will initially use AI to sell more devices.
- Google is shifting its legacy product, Google Search, to an AI model and moving into the AI hardware market with its TPU. Google is also integrating Gemini into its productivity software, as Microsoft is doing with Copilot.
At some point, all three companies will likely compete head-to-head with subscription-based AI assistants or chatbots. According to Grand View Research, the conversational AI market was valued at $7.6 billion in 2022. The compound annual growth (CAGR) expectation is 23.6% between 2023 and 2030. That equates to annual revenues of $41.39 billion by 2030.
Apple is well positioned to lead in that segment, thanks to the brand loyalty of its customers and huge installed base of devices. Apple’s efforts to protect user data while it personalizes AI experiences is also a differentiator.
Microsoft is likely to shine in the business market, assuming Copilot evolves into a necessary efficiency tool for Microsoft Office users.
The value of Google’s strategy is still unclear. The company looks to be forcing itself into the AI space rather than innovating new, truly helpful solutions.
The inclusion of AI overviews into Google Search, for example, puts Search in direct competition with ChatGPT and every other AI assistant. But unless users want Search to function like ChatGPT, this is a risky move that could damage the brand reputation for both Search and Gemini. A quick search of “how to turn off AI overviews in Google” returns multiple articles explaining how to block this feature—indicating many users don’t appreciate the change.
Risks and Challenges
AI is wildly popular among investors right now, but there are risks ahead. Three to note are the uncertain regulatory future, fast-changing customer expectations and the amount of funding required to develop AI models.
- Uncertain regulatory future: According to the Stanford University AI Index Report 2024, there was one AI-related regulation in 2016. In 2023, there were 25. Global concerns over AI accuracy and data privacy may introduce an increasingly strict regulatory environment. This would raise already high development and operational costs for AI software providers.
- Fast-changing customer expectations: Developers of AI products and services must contend with continuously evolving customer expectations. The thrill of generative power, for example, may give way to frustration with AI’s inability to be consistently accurate. Also, the fast pace of development could encourage obsolescence since customers are still learning how to use AI. Demand will follow the latest and greatest tools, which could leave early innovations behind.
- High funding requirements: Computing costs to train OpenAI’s GPT-4 and Google’s Gemini Ultra totaled $78 million and $191 million, respectively, according to the Stanford AI report. Companies investing these sums do so assuming these models won’t become outdated before they deliver returns.
Long-Term Outlook
Despite the risks, researchers see the overall AI market growing substantially over the next six years. Grand View Research expects a CAGR of 25.6%, driving annual revenues to $219 billion in 2030, from $55.82 billion in 2024.
That growth will require significant upfront investment. Goldman Sachs predicts annual AI investments will stretch up to $200 billion by 2025, with measurable productivity gains to follow as AI adoption rises.
If the stock market were rational, those numbers would set the stage for a waiting game. But investors are naturally predictive, pricing in value long before it hits the bottom line. This proactive approach lends itself to volatility, as investors can be easily swayed when the future is uncertain.
Here’s the takeaway. Investing in AI now has strong upside in the long run, but the road ahead will be rocky.
Bottom Line
In the AI race, MSFT stock is a safer choice than AAPL stock or GOOGL stock in the near term and long term. Microsoft has a natural distribution system with access to consumers and business customers via its software products and Microsoft Cloud.
Apple has potential to dominate, but this is harder to predict until Apple Intelligence gets into customers’ hands. Google’s strategy is the least certain. Without unique innovations, there are risks to competing directly with AI power hitters and reshaping Search, which has historically been the company’s cash cow.
In the short-term, only Microsoft is likely to report an earnings boost that’s directly related to AI. It will come from the company’s Cloud services. Alphabet’s cloud business is also growing, but from a much smaller base versus Microsoft. My bet is on MSFT, which is why it’s the only stock of the three that I own directly.