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Over the past week, Silicon Valley tech majors have been the main focus of Wall Street. Stocks of some of these companies have seen a sharp jump driven by a conspiracy of factors including stellar earnings reports, notable market share gains, technological advancements, and strong prospects for profitability.
These companies have positioned themselves as frontrunners in their respective markets, leveraging innovative strategies, differentiated product offerings and a growing focus on artificial intelligence (AI), earning fair value boosts from Morningstar equity analysts.
This may be a good time for tech-focused investors to keep a close tab on the following players. These companies continue to build enduring strength and boast a long runway of sustainable growth and profitability, propelled by secular trends.
iPhone maker Apple (APPL) is one of the largest companies in the world, with a broad portfolio of hardware and software products.
The tech behemoth recently reported fiscal second-quarter earnings with a revenue of US$90.75 billion, topping estimates. It also announced the largest share buyback program of US$110 billion, fuelling its stock rally.
While revenue declined 4% year over year and iPhone revenue, Apple’s primary driver, fell 10% for the same period, a healthy medium-term expectation for it, as well as services, prompted Morningstar equity analyst William Kerwin to raise the stock’s fair value to US$170 from US$160.
Anticipated challenges in fiscal 2024 may dampen Apple's performance, particularly due to reduced iPhone revenue in China and a slower pace of iPhone refreshes worldwide. Nonetheless, Kerwin's decision to raise the fair value was influenced by the expectation of “iPhone revenue growth in fiscal 2025 in anticipation of a stronger refresh cycle for the iPhone 16 in fall 2024.”
The forecast for higher 2025 revenue is also underpinned by the prospect of generative AI functionality being added to the next iteration of the phone, the iPhone 16, come September.
“We believe Apple will make an announcement surrounding generative AI at its developer conference in June, where it typically announces its new iOS software for the iPhone,” says Kerwin.
Apple’s generative artificial intelligence product announcements this year could drive improved growth next year and kickstart a new super cycle of consumer adoption and market expansion.
Google parent, Alphabet (GOOG) generates 90% of its revenue from the search engine, of which more than 85% is from online ads. Additional revenue comes from Google Play and YouTube, as well as hardware like Chromebooks, the Pixel smartphone, and smart home devices.
Alphabet recently reported robust first quarter earnings, marked by accelerated revenue growth and increased margins due to restructuring initiatives. Furthermore, the company introduced a dividend program to the tune of approximately US$10 billion annually and green lit an extra US$70 billion for share buybacks.
Total revenue jumped 15% year over year, versus 13% last quarter, while search advertising revenue rose 14%, driven by growth in Asia.
“Google’s ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers,” says a Morningstar equity report.
The firm leverages tech innovation to enhance user experiences across Google products, streamlining ad transactions for publishers and advertisers. This includes AI integration for search result delivery.
“The introduction of generative AI adds some uncertainty, but we expect Google will ultimately use its information advantage to maintain its dominance,” notes Morningstar equity analyst, Michael Hodel, who upped the stock’s fair value to US$179 from US$171.
However, with the recent surge in the stock price following the earnings release, the shares are now fairly valued, he adds.
World’s biggest company by market cap, as of May 03, Microsoft (MSFT) is best known for its Windows operating systems and Office productivity suite. The company operates three business segments: productivity and business processes (legacy and cloud-based Microsoft Office), intelligence cloud (Azure, Windows Server OS), and more personal computing (Windows Client, Xbox, Bing search, and Surface laptops, tablets, and desktops).
Microsoft recently delivered blockbuster third-quarter results, surpassing both top- and bottom-line estimates. Revenue increased 17% year over year to US$61.86 billion, while productivity and business processes jumped 12%, intelligent cloud increased 21%, and personal computing expanded 17%.
Given strong near-term growth and profitability, Morningstar equity analyst Dan Romanoff raised the stock’s fair value to US$435 from US$420.
These impressive results underscore the strength in the company’s artificial intelligence, Azure, and gaming offerings. “AI remains the focal point and contributed 700 basis points to Azure’s growth,” says Romanoff, who points to management’s guidance for fiscal 2025, which includes double-digit revenue growth and operating margin contraction of about 1 percentage point.
The Intelligent Cloud (IC) segment has emerged as the crown jewel of the business, accounting for 40% to 45% of the firm’s total revenue. Azure represents 25% to 30% of total company revenue, or two thirds of the IC segment. The segment also includes OpenAI, which has helped Microsoft gain leadership position in artificial intelligence.
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