When looking at megacap tech stocks, two stand out today as major values: Microsoft (MSFT 0.28%) and Meta Platforms (META +0.42%). Both stocks are trading well below their normal valuation ranges, and could represent incredible buying opportunities. But the question for potential investors is, which one is the better value now?
Image source: Getty Images.
Different approaches to the AI megatrend
Microsoft has established itself as the world’s primary supplier of business productivity software. It rolled out its artificial intelligence (AI) assistant, Copilot, into this popular product suite and is generating billions of dollars in subscription revenue from this platform. Additionally, Microsoft is benefiting from the AI build-out by supplying infrastructure that companies can use to build and train AI applications. Azure is Microsoft’s cloud computing platform, and countless AI companies are using it to build their models — foremost among them, OpenAI, the maker of ChatGPT. Revenues from Azure and other cloud services grew by 40% during Microsoft’s latest reported fiscal quarter — making that its fastest-growing business.
Today’s Change
(-0.28%) $-1.18
Current Price
$417.91
Key Data Points
Market Cap
$3.1T
Day’s Range
$416.35 – $424.40
52wk Range
$356.28 – $555.45
Volume
499.2K
Avg Vol
34.3M
Gross Margin
68.31%
Dividend Yield
0.85%
Meta Platforms is probably better known by its previous name, Facebook. Meta also owns other social media apps such as Instagram, Threads, and WhatsApp. These platforms generate billions of dollars in ad revenue, which doesn’t sound like an AI business. However, AI has transformed how companies create, deploy, and target ads on its platforms, which has resulted in major revenue growth for Meta. In Q1, its top line rose 33% year over year, with nearly all the growth attributed to its ad business.
Beyond that, Meta is working on some AI products that could transform the company. It’s working on developing a superintelligence model that it says will act as a true digital assistant to every user. It’s also working on AI smartglasses, which would allow AI to interact with the world that we see, further expanding the use case of Meta’s AI model.
Today’s Change
(0.42%) $2.56
Current Price
$609.94
Key Data Points
Market Cap
$1.5T
Day’s Range
$606.98 – $614.80
52wk Range
$520.26 – $796.25
Volume
233.5K
Avg Vol
15.3M
Gross Margin
81.94%
Dividend Yield
0.35%
As of now, the impacts of Microsoft’s AI-related efforts are being more deeply felt within the company, but Meta’s upside potential from AI is far greater. This translates nicely into the difference between their valuations, as the market’s skepticism about Meta’s AI approach is showing up there.
Both companies are spending big on infrastructure
To realize their AI visions, both companies are spending hundreds of billions of dollars annually to build and outfit data centers. Investors are a little bit more accepting of the scale of Microsoft’s capital expenditure budget, as it has a clearer way to monetize these build-outs through its cloud computing wing. Meta can’t monetize these investments right now, so the market is a bit more critical of its plans.
Regardless, when a company is in the midst of a heavy investment cycle, that can do goofy things to its earnings metric via the depreciation line item. Companies like Microsoft also have major investments in AI companies like OpenAI; any gains from investments must be reported as earnings — even if the company doesn’t sell the shares and lock those gains in. So, valuing these businesses strictly based on earnings doesn’t offer fair comparisons either to each other or to their historical standings.
Using a metric that narrows the focus down to cash from operations (CFO) is a much smarter idea, as it filters out all of the effects mentioned above and only measures how much cash a business is producing. From a price-to-CFO perspective, Meta is cheaper, but there are some interesting things to note about Microsoft’s price.
META Price to CFO Per Share (TTM) data by YCharts.
For the better part of five years, Microsoft has traded at a price-to-cash-from-operations ratio in the upper 20s. Now it has dipped below 20. Meta has rarely traded for more than 20 times operating cash flow, but it is near the bottom end of its normal range. I think that sums up these two perfectly. Meta is cheaper, and it has more upside if its AI plans work out. However, Microsoft is a better bargain overall because its AI business is already booming, and there isn’t a good reason why it shouldn’t be trading at about the same upper-20s price-to-CFO ratio that it normally does. As a result, I think Microsoft is the better buy now, but Meta Platforms is still a great stock to pick up, too.
