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Alphabet (GOOGL) and Microsoft (MSFT) are up less than +5% this year, below the 10% gain for the Nasdaq 100 Stock Index ($IUXX) (QQQ) and the 60% surge in Nvidia (NVDA). While Nvidia and other lesser-known artificial intelligence (AI) stocks have soared this year on speculation AI will boost their business models, Alphabet and Microsoft have underperformed.
While the underperformance of Alphabet and Microsoft can be partly blamed on the jump in interest rates from the Federal Reserve’s aggressive rate hike campaign to combat inflation, some technology stocks will be slow to see payback from their investments in AI. Investment Partners Asset Management said, “if you’re only buying Alphabet and Microsoft for AI, you might be disappointed by how slowly it rolls out and translates to revenue growth.”
Stocks like Nvidia, which will see an immediate demand for its chips needed for complex AI computing tasks stand to gain right away from AI. However, Alphabet and Microsoft are focusing on AI’s applications in search, which, while it could be a long-term growth driver, is also expensive to develop. Alphabet said it is integrating AI into its Google search engine, and Microsoft invested $10 billion in OpenAI and recently unveiled a new version of its Bing search engine and Edge browser that incorporates AI technology.
With an expected economic slowdown, Alphabet and Microsoft are also battling slowing revenue streams as they push into AI. In their latest quarterly results, Alphabet pointed to lower demand for search advertising, and Microsoft warned of a slowdown in cloud and business software sales. Despite their underperformance, Alphabet and Microsoft have favorable standing among analysts, with about 90% of the analysts who track the stocks having buy recommendations on both companies. Also, their valuations are reasonable as Alphabet trades at less than 16 times forward earnings, below its five-year average, and Microsoft trades below its five-year average multiple.
UBS Group AG estimates the AI market will grow rapidly, with investment in the AI hardware and services market expected to reach $90 billion by 2025, up from $36 billion in 2020. Defiance ETFs said that “while the short-term backdrop from Alphabet and Microsoft Is not good, we’re bullish about these two and the exciting services they will offer over the next couple of years. They are great companies, but AI is the cherry on top.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.