Better Artificial Intelligence (AI) Stock: Microsoft Vs. Oracle

The cloud infrastructure market has received a good boost in the last couple of years due to the growing adoption of artificial intelligence (AI). Companies across the globe have used cloud services to train AI models for their specific purposes.

The massive demand for AI in the cloud is the reason Goldman Sachs The global cloud infrastructure market is expected to reach $2 trillion in revenue in 2030, compared to $496 billion last year. The investment bank estimates that generative AI alone could drive $200 billion to $300 billion in annual cloud spending by the end of the decade.

Microsoft (MSFT -0.76%) and Oracle (ORCL 0.38%) are two companies trying to make the most of this huge cloud infrastructure opportunity. But which of these two cloud-centric AI stocks should you consider buying right now? Let’s find out.

The case for Microsoft

Microsoft was one of the first movers in the AI ​​market thanks to its partnership with OpenAI, the developer of ChatGPT. This partnership has helped the company quickly integrate AI-focused tools into several of its products, such as Azure Cloud, the Windows operating system, and Microsoft 365 office productivity and collaboration tools.

The company’s AI-specific services have gained impressive traction. For example, its generative AI assistant, Microsoft Copilot, has seen a healthy increase in demand in several areas. On the July earnings conference call, CEO Satya Nadella said that its GitHub development platform Copilot is being widely deployed by enterprise customers, with more than 77,000 people choosing it, up 180% from year to year. Nadella added that Copilot accounted for more than 40% of GitHub’s revenue growth in fiscal 2024 (which ended June 30). Microsoft’s Power Platform, which enables customers to build AI-embedded applications, had sequential growth of 45% in the previous quarter. Copilot for Microsoft 365, which is the company’s cloud-based suite of productivity and collaboration tools, saw 60% sequential growth in its customer base last quarter.

Investment banking company Piper Sandler estimates that Microsoft 365 Copilot alone could generate $10 billion in annual revenue for the company by 2026. More importantly, Copilot could unlock a great long-term opportunity as the market for intelligent virtual assistants is expected to grow 27% annually through in 2032, generating nearly $100 billion in revenue that year, compared to last year’s $10 billion.

AI has also boosted Microsoft’s cloud computing business. The company reported 60,000 customers using its Azure AI cloud service last quarter, up 60% from the year-ago period, with average spend per customer increasing.

As a result, Azure revenue grew 30% year-over-year last quarter (in constant currency terms), and 8 percentage points of that growth was attributed to AI services. Microsoft is the second largest provider of cloud infrastructure services with a 20% market share, so its cloud business should benefit from the adoption of AI services.

MSFT revenue estimates for the current fiscal year; data by YCharts.

Microsoft is making the most of the lucrative cloud AI market thanks to its presence in multiple applications. Analysts expect revenue growth to remain solid over the next three fiscal years, after rising 16 percent in fiscal 2024 to $245 billion.

But is it a better investment than Oracle?

The case for Oracle

Oracle has recently emerged on the AI ​​scene, with customers using its cloud infrastructure to train AI models. Cloud infrastructure revenue rose 45% year-over-year in the first quarter of fiscal 2025 (ended August 31, 2024) to $2.2 billion, outpacing the company’s 7% increase in total revenue to $13.3 billion USD.

Cloud infrastructure-as-a-service company Oracle expects impressive and prolonged growth for two reasons. First, the infrastructure-as-a-service market is expected to reach $580 billion by 2030, accounting for a large portion of global cloud spending. Second, Oracle is scrambling to increase capacity as demand for its cloud infrastructure outstrips supply.

Its cloud business’s remaining performance obligations (RPOs) rose 80% year-over-year in the last quarter. RPO is the total value of a company’s contracts that have not yet been fulfilled, and total RPO grew 52% year-over-year in the first quarter of fiscal 2025 to $99 billion.

Oracle is on track to double its capital spending in fiscal 2025 to $15 billion. The goal is to enable the company to serve the additional demand related to AI. Management expects revenue to grow 10% in fiscal 2025 to $58 billion. Previous projections had growth pegged at 7%.

Management believes the company could achieve 12% revenue growth in fiscal 2026 to $65 billion as it turns more of its RPO into revenue. It also upgraded its long-term forecasts and expects its top-line value to grow to at least $104 billion in fiscal 2029, along with annual earnings growth of more than 20% over the next five years.

This is where the company enjoys an advantage over Microsoft, whose earnings are forecast to grow at an annual rate of just under 15% over the next five years.

verdict

Microsoft and Oracle are the top cloud computing stocks benefiting from the proliferation of cloud AI services. Microsoft is growing faster than Oracle right now. At the same time, Oracle’s solid revenue volume is why its growth rate is expected to outpace Microsoft’s in the future.

As such, it comes down to evaluating the two companies to determine which is the better AI game right now. The following chart shows us that Microsoft is the cheaper of the two stocks when we compare their trailing price-to-earnings (P/E) ratios. However, Oracle’s forward earnings multiple is much lower than Microsoft’s and indicates stronger earnings growth.

MSFT PE report data by YCharts.

Oracle is also undervalued in terms of the price-to-earnings-growth (PEG) ratio of the two companies.

Data on MSFT PEG ratio (before) by YCharts.

The PEG ratio is a forward-looking valuation measure that takes into account the potential earnings growth a company is likely to produce. A reading of less than 1 indicates that a stock is undervalued relative to its growth outlook, which is why investors looking to add an AI stock that could capitalize on the lucrative cloud computing market may be tempted to buy Oracle over Microsoft.