This underdog from the Magnificent 7 could be the surprise winner in 2025

If you think about the Magnificent 7 stocks, and let’s face it, it’s hard not to, given the way they have dominated the equity markets in 2024.

You might imagine that they all move together, in the same direction (upward), at the same time.

However that isn’t the case, and there are some stark contrasts to be found among the members of the septet.

For example, though the Nvidia stock price may have risen by more than +60.0% over the last 6 months.
Google owner Alphabet GOOG, has added just +3.15%, whilst Microsoft MSFT has managed a paltry +2.48% gain.

Meanwhile, EV maker Tesla TSLA spent most of 2024 in negative territory only posting year-to-date gains in recent weeks. As recently as April, its year-to-date performance was underwater by as much as -44.0%.

And, over the last month, both Meta Platforms META and Apple AAPL are in the red, with their stock prices losing -2.25% and -1.33% respectively.

The question then is:

Does this variation in performance. among the Magnificent 7 create opportunities for investors?

I think the answer to that is yes, however, we need to be rational about trying to exploit them.

For example, we need to compare apples with apples, and not apples with oranges.

With that in mind, I would like to examine the relative performance of Microsoft, Alphabet and Amazon AMZN, three businesses which, though intrinsically different, directly compete with each other in some key areas including cloud computing.

Let’s start by comparing the relative performance between the three stocks, year-to-date

MSFT is up by +13.52% in 2024, however, Alphabet has risen by +25.84% and Amazon by +39.19%. That compares to a gain of +24.72% in the wider S&P 500, and +28.77% for the S&P 100 index.

Now let’s consider the PE ratios of the three businesses

Microsoft is on a forward PE of 32.68, Amazon is on a multiple of 39.67 and Alphabet sits on a ratio of 22.94. The latter is in line with the S&P 500’s forward PE of 22.20 times, though both are above the S&P’s 5-year average of 19.60 and the 10-year average for the index of 18.1 times earnings.

So Microsoft looks expensive on this measure and indeed it’s got the lowest five-year revenue growth rate of the three, at 94.78%, well below the 146.0% of Amazon and 124.60% at Alphabet.

Microsoft fares better if we consider earnings growth, which over the last 5-years, has risen by 148.42% at MSFT. That’s above the growth rate at Amazon of 143.70% but below Alphabet’s 181.19%.

So where does the opportunity lie for Microsoft?

There are two reasons why I think Microsoft’s share price could enjoy a resurgence.

Firstly, the likely growth in cloud computing. The market for which was worth just over $602.0 billion in 2023. However, that figure is expected to grow at a compound rate of 14.41% per annum and reach $2.390 trillion, in 2030, according to data from Grandview Research.

Microsoft currently has around a 22.0% share of the global Cloud Computing market, which, compares to Amazon’s 33.0% share and Google’s 10.0% slice of the pie.

What’s more, Microsoft’s Azure Cloud has been growing revenue at a faster rate than its rivals, posting 30% year-over-year growth in Q2 2024.

The other reason that I think Microsoft could be worth a look over the medium term is profitability.

Microsoft’s profit margins are streets ahead of those at Amazon and Alphabet at 35.96% versus 5.29% at Amazon and 24.01% at Alphabet.

If Microsoft can continue to grow its cloud computing revenues and maintain profitability in the wider business, then surely that’s a recipe for success.

Let’s not forget that Microsoft also pays a dividend, unlike Amazon and Alphabet, and that this dividend has grown by almost +63.0% in the last 5 years.

Right now 34 out of 40 Wall Street analysts covering the stock rate Microsoft as a strong buy, with an average target price of $504.45 which is almost $80.00 above the current levels.