The massive surge in artificial intelligence (AI) stocks was hard to miss. When OpenAI’s ChatGPT gained mainstream acceptance, investors began to focus on stocks with exposure to the booming AI market. As one of the main drivers of overall market performance for most of the past two years, it’s fair to say that AI has truly arrived and the investment theme is firmly embedded in the minds and portfolios of most market participants.

However, with the AI ​​market set to be worth around $621 billion in 2024 and expected to register a compound annual growth rate of 20.4% by 2032 and reach the staggering size of $2.7 trillion, this trend seems to be in its infancy. To make the most of the expected long-term growth in the AI ​​space, investors should be careful not to invest their capital in shares of dubious companies that are “AI pretenders” rather than genuine innovators working on and profiting from the technology, as the obvious parallels to the dot-com bubble at the turn of the millennium cannot be ignored.

Here is Microsoft MSFT and Oracle ORCL comes into play. These two software giants have been in the market for decades and have weathered some challenging economic cycles – including the aforementioned tech bubble. Now they are moving to the forefront of the AI ​​revolution, albeit in different ways. With solid fundamentals and strong business prospects, shares of both tech giants have received 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

Microsoft was co-founded by Bill Gates almost five decades ago. MSFT started 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 major products have become household names over the years, including Windows, MS Office, Azure and Xbox. The company has a gigantic market capitalization of $3.08 trillion.

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

Microsoft’s latest quarterly results were impressive after the company’s fourth-quarter revenue and profit beat consensus estimates. MSFT reported fourth-quarter revenue of $64.7 billion, up 15.2% year over year. A 31% year over year increase in services and other revenue drove overall growth, while revenue from the products segment declined 21.6% during the same period.

Earnings per share rose 10% year over year to $2.95, beating the consensus estimate. Notably, this was the company’s eighth consecutive quarterly earnings beat. Overall, Microsoft’s revenue and earnings per share have posted compound annual growth rates of 10.94% and 14.85%, respectively, over the past 10 years.

Net cash flow from operating activities increased to $37.2 billion in the fourth quarter from $28.8 billion a year ago, with the company ending the quarter with cash on hand of $18.3 billion.

As for Microsoft’s AI capabilities, the multi-billion dollar investment in OpenAI’s ChatGPT is well known. In addition, the company spent $19 billion in capital expenditures on AI in the fourth quarter.

In addition, Microsoft’s generative AI assistant Copilot is now integrated into various apps and platforms within its ecosystem, resulting in a 60% year-on-year increase in customers, testifying to the quality and adoption of the product.

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

Looking ahead, analysts forecast MSFT revenue growth of 14.65% and EPS growth of 16.60%, compared to industry medians of 6.47% and 6.98%, respectively.

Overall, analysts have rated the stock a Strong Buy with an average price target of $499.58, implying an upside potential of about 20% from current levels. 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

Oracle was founded in 1977 and is headquartered in Austin. ORCL is a multinational computer technology company 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 share price has risen 31.9% year-to-date, outperforming the broader stock market. The company also offers a dividend yield of 1.16%, based on nine years of steady growth. With a modest payout ratio of just 28.73%, Oracle has room to continue increasing its dividends in the coming years.

However, Oracle’s results for the latest quarter did not meet expectations, as revenue and profit in the fiscal fourth quarter did not beat expectations. However, revenue increased 3.3% year-on-year to $14.3 billion, with its cloud services business growing 9.2% to $10.2 billion in the same period.

Earnings per share fell 2.4% year over year to $1.63, below the consensus estimate of $1.65. This was the first time in seven quarters that Oracle’s earnings per share missed estimates.

Oracle generated net cash from operating activities of $18.7 billion in fiscal 2024, up from $17.2 billion in fiscal 2023. Free cash flow increased to $11.8 billion from $8.5 billion a year earlier. Overall, the company ended the quarter with cash on hand of $10.4 billion. While this is significantly lower than its debt level of $86 billion, most of its debt is more than five years past due.

Currently, Oracle is innovating in the field of artificial intelligence by training models directly on customer data within its infrastructure. This improves privacy, security and accuracy by eliminating the need to transfer sensitive information to the cloud. Oracle’s competitive advantage is that its Cloud Area Network is more flexible than its competitors, resulting in lower costs for its customers. This has led to “the most successful and successful AI companies in the world using Oracle’s cloud services and data centers,” according to CEO Safra Catz.

Oracle has also landed some major customers, including a $10 billion cloud deal with Elon Musk-led startup xAI. Musk reportedly plans to lease Oracle’s cloud servers for several years. Oracle also recently struck a pact with data analytics company Palantir. PLTR to offer AI solutions to governments and businesses. In addition, the company signed an agreement with OpenAI in early June to provide additional cloud capacity, although OpenAI is closely aligned with Microsoft and already uses Microsoft Azure.

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 evident, as Oracle has at least 40 new AI contracts worth billions that have not yet been implemented, demonstrating the value of this approach.

Analysts forecast ORCL to deliver robust earnings growth going forward. On average, EPS growth is expected to be 21.29%, well above the industry average of 6.98%. ORCL is currently priced more favorably in terms of projected earnings growth, although its earnings per share cannot quite match that of $3 trillion giant Microsoft.

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

As of the date of publication, Pathikrit Bose had no position (either directly or indirectly) 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 see Barchart’s disclosure policy here.