The S&P 500 has seen a remarkable surge this year, with a 19% increase largely attributed to the influential tech stocks, often referred to as the Magnificent Seven. While Nvidia has taken center stage in driving these gains, other heavyweights like Meta Platforms have also played significant roles. Unfortunately, not all members of this elite group have performed equally well, particularly Tesla and Microsoft.
Tesla’s stock has dipped by 3% this year, while Microsoft’s has seen a modest gain of 9%. However, forecasts from Wall Street analysts suggest divergent paths for these two companies in the coming year.
Currently, analysts covering Microsoft provide a median price target of $497.50 per share, indicating a potential upside of around 22% from its present trading price of $409. Conversely, Tesla’s projection is less rosy, with a median price target of $225 per share signifying a potential decline of 7% from its current value of $241. This discrepancy suggests that investors may find it more prudent to opt for Microsoft over Tesla in the near term.
Delving deeper into Microsoft, it remains a titan in the software sector, and it holds the position of the second-largest player in the cloud computing landscape. Key offerings such as Microsoft 365 for office productivity, Dynamics 365 for enterprise resource planning, and Power BI for business intelligence solidify its leadership. Noteworthy is Microsoft’s rapid advancement in generative artificial intelligence (AI), which is enhancing productivity across various sectors. In the latest quarter, the adoption of Microsoft 365 Copilot surged more than 60%, showcasing strong user engagement.
Though Microsoft Azure is still in the shadow of Amazon Web Services regarding cloud revenue, its strides in AI and machine learning have helped it gain valuable market share. Recent reports reveal that Azure’s client base for AI solutions grew nearly 60% over the past year, reflecting CEO Satya Nadella’s commitment to innovation.
Microsoft recently announced its fiscal Q4 results, surpassing analyst estimates with a 15% year-over-year revenue increase, reaching $64.7 billion. Their GAAP earnings rose 10% to $2.95 per share, buoyed by the acquisition of Activision, which contributed positively to revenue albeit negatively impacted earnings growth. Looking ahead, Microsoft is positioned to harness the full potential of generative AI, bolstered by its robust software suite and cloud infrastructure. Analysts anticipate its earnings to grow at an impressive annual rate of 13% over the next three years.
On the flip side, Tesla has been grappling with challenges stemming from inflation and elevated interest rates that have weakened consumer purchasing power. This has forced the automaker to reduce vehicle prices several times in an attempt to stimulate demand. Despite being a leader with a 17.6% market share in the battery electric vehicle sector through July, Tesla’s market share has dropped by 3.3 percentage points compared to the previous year.
The pressure on sales has recently translated into disappointing quarterly results for Tesla. Their revenue ticked up by a mere 2% to $25.5 billion, while the operating margin saw a decline of 3.3 percentage points, and even more concerning, their non-GAAP net income fell by a staggering 43% to $0.52 per share. For investors, the fact that Tesla has missed earnings expectations in four consecutive quarters raises significant red flags.
Despite these hurdles, Tesla is eyeing autonomous driving technology as its next frontier for growth. With their Full Self-Driving (FSD) software already available on a subscription basis, CEO Elon Musk has indicated potential partnerships with other automakers for FSD licensing. Furthermore, their ambitions for robotaxi services are becoming clearer, with Tesla asserting that the data they have amassed from FSD—about 1.6 billion miles—positions them uniquely ahead of competitors in training autonomous systems.
Looking forward, analysts project a 12% annual earnings increase for Tesla over the next three years. This expectation, however, underscores a valuation that some may consider overly ambitious at 68 times earnings. Nonetheless, should Tesla’s plans for widespread robotaxi services materialize, drastically improving earnings estimates could change the narrative entirely.
In conclusion, for investors contemplating allocations in Tesla or Microsoft, a strategic approach is essential. Those skeptical of Tesla’s elusive autonomous driving future might consider parting ways with their investment, while those confident in its trajectory might hold firm. Alternatively, Microsoft emerges as a strong candidate for investment, especially if its stock sees a pullback, making it an attractive addition for those looking to capitalize on its robust growth prospects.