Larger companies are sometimes perceived as having less upside potential than smaller ones. That's one reason some people might hesitate to invest in stocks with market caps above $1 trillion.
But tech giants Microsoft (MSFT 1.92%) and Meta Platforms (META 2.11%) have a new secret weapon that could allow them to deliver solid returns in the medium term: artificial intelligence (AI). Even beyond that, Microsoft and Meta Platforms have numerous qualities of "forever stocks."
NASDAQ: MSFT
Key Data Points
1. Microsoft
Microsoft was partly responsible for kick-starting Wall Street's recent obsession with AI, which began when ChatGPT burst onto the scene. Microsoft has been an investor in OpenAI, the company behind ChatGPT.
Since the initial craze that made the AI chatbot famous, the two companies have amended their collaboration, with Microsoft doubling down and boosting its stake in the privately held AI specialist to 49%. The partners also offer services that allow other companies to build their own generative AI platforms, which Microsoft offers through its cloud computing arm, Azure.
According to Microsoft's management, more than 65% of the Fortune 500 now use Azure OpenAI services. Those services look particularly promising for the company, not least because cloud computing was already its most important growth driver. Management says that Azure continues to gain market share partly thanks to AI.
That is helping Microsoft deliver solid results. In its fiscal 2024 third quarter, which ended March 31, revenue increased by 17% year over year to $61.9 billion, and net income rose 20% to $21.9 billion.
Its recent results have been strong, but what makes Microsoft a forever stock? At least three things: First, it is an incredibly innovative company, an important factor for it to stay relevant and successful over the long run.
Second, the company has solid competitive advantages stemming from several sources. Its computer operating system benefits from high switching costs, and it has one of the most valuable brand names in the world.
And third, it has attractive opportunities and a long runway for growth in several industries, especially in AI and cloud computing. Income seekers should also find what they want with this stock: Microsoft is arguably the most attractive dividend stock among the "Magnificent Seven."
The company has increased its payouts by almost 168% in the past decade, and reinvested dividends can substantially boost investors' long-term returns. That's another excellent reason to hold on to the stock for good.
NASDAQ: META
Key Data Points
2. Meta Platforms
Last year, Facebook parent Meta Platforms released Llama, a large language model that has become popular in its own right. It has since introduced several newer versions of Llama in an open-source capacity.
Llama is the backbone of Meta AI, a virtual assistant the company recently debuted. Meta Platforms has also implemented various other related initiatives to boost its business. AI algorithms on Facebook and Instagram that help encourage users to watch Reels for extended stretches of time are helping bolster the company's advertising revenue.
That being said, AI doesn't contribute much to Meta's revenue and earnings yet, but that could change, considering the company is setting itself up to be a leader in the field.
In the meantime, it still has one of the largest digital ecosystems -- perhaps the largest -- of any company worldwide. It ended the first quarter with 3.24 billion daily active users. When ad spending dropped a couple of years ago, it navigated that storm, and has now rebounded, partly thanks to its vast user base. In the first quarter, revenue increased by 27% year over year to $36.5 billion. Its net income more than doubled to $12.4 billion.
And the company benefits from the network effect. A website like Instagram becomes more valuable as more people use it -- the more people who are on it, the more useful it will be to them, and the more that people on the outside looking in will tend to want to join it. The same applies to Facebook. Meta Platforms has also proved to be an innovative company beyond AI. It is one of the leaders in virtual reality.
Innovation, an economic moat in the form of the network effect, and growth potential in fields such as AI and online advertising make Meta Platforms an excellent forever stock.
