META vs. MSFT: Which AI leader offers better long-term returns?

Both Meta (META) and Microsoft (MSFT) are at the forefront of the AI ​​revolution. But which investment is likely to bring higher returns in the long term? In my analysis, Microsoft is better positioned for long-term stock performance due to its stable monetization strategy and significantly more attractive valuation. While I remain bullish on both investments, I’m currently leaning heavily towards buying Microsoft over Meta.

Meta has secretly won the AI ​​arms race

I’m bullish on Meta, which is investing heavily in AI and has committed a significant $35 billion into the technology in 2024 alone. The company leverages its extensive ecosystem of apps – including Facebook, Instagram, WhatsApp and Messenger – to seamlessly integrate AI capabilities. For example, the launch of Meta AI, an assistant based on the Llama 3 language model, reached 500 million users in just seven months.

In addition to its aggressive AI investments, Meta has differentiated itself from the competition by open-sourcing its AI models like Llama 3. While competitors like OpenAI and Google (GOOG) (GOOGL) typically keep their models proprietary, Meta’s open source strategy encourages innovation and collaboration, allowing other technology companies and developers to test and improve their models.

Additionally, Meta is a leader in AI model transparency. Methods have been developed to make AI decision-making processes fully interpretable and thus address the “black box” problem in AI. By pioneering transparency and accountability, Meta positions itself as a responsible leader in the AI ​​industry – a critical advantage as AI adoption expands into key areas such as healthcare and finance.

Valuation of META shares

Meta’s rise in AI, although initially unexpected, is now firmly on the radar of technology investors. So it’s no surprise that the company is trading near all-time highs. But at what price should it be traded? To value the company, I first estimate Meta’s full-year 2034 EBITDA at $278.65 billion. Assuming a conservative EV-to-EBITDA ratio of 12.3, reflecting slower growth expectations compared to recent years, Meta’s enterprise value would be $3.43 trillion in December 2034.

With a mean weighted average cost of capital (WACC) of about 8.5% over the last decade, I then discount this projected enterprise value to December 2024 and arrive at an intrinsic value of $1.52 trillion. Since Meta’s current enterprise value is $1.41 trillion, this represents a modest 7.6% margin of safety for investors.

What does Wall Street say about meta?

Meta currently has a Wall Street consensus rating of Strong Buy with an average META price target of $662.62, implying an upside potential of 15.4%. This is based on 40 buys, three holds and one sell, further supporting my view that Meta is a viable investment option.

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Microsoft dominates in AI and is undervalued

I’m also very bullish on Microsoft, which has a prominent presence in cloud-based AI, particularly through its Azure platform. The company is a leader in traditional and generative AI adoption and has the highest number of new AI customers and generative AI users compared to its competitors AWS (AMZN) and Google. Microsoft’s leadership position is strengthened by its partnership with OpenAI, which has enabled seamless integration of cutting-edge AI technologies into its cloud services.

Unlike Meta, Microsoft has a clear and direct monetization path for its AI features. The company has integrated AI across its product suite, improving the user experience with tools like Microsoft 365 Copilot, now used by nearly 70% of Fortune 500 companies.

Microsoft also values ​​ethical and transparent AI, which is critical to focusing on high-impact sectors like healthcare. Its advances in multimodal medical imaging and AI-driven care workflow solutions significantly improve patient care. Additionally, Microsoft’s AI initiatives extend to finance, customer service, and defense, as demonstrated by its collaboration with Palantir (PLTR) on AI solutions for Western defense.

Valuation of MSFT stock

To value Microsoft, I first estimate the company’s December 2034 EBITDA to be $616.8 billion. Using a conservative EV-to-EBITDA multiple of 20.3 – matched to the midpoint of the 10-year median and five-year average – my forecast for Microsoft’s enterprise value through December 2034 is 12.52 Trillion US dollars.

Furthermore, Microsoft’s WACC is 9.81%, with equity at 97.64% and debt at 2.36%. After recalculating my forecast from December 2034 to December 2024, I calculate an intrinsic enterprise value of $4.91 trillion. Given Microsoft’s current enterprise value of $3.13 trillion, this represents a significant 56.91% margin of safety for investors.

What does Wall Street say about Microsoft?

Microsoft also has a Wall Street consensus rating of Strong Buy with an average MSFT price target of $496.92, implying an upside potential of 17.35%. This rating is supported by 26 Buys, three Holds, and no Sells, supporting my thesis that Microsoft represents an attractive investment opportunity.

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Conclusion: Microsoft is the better investment

While both Meta and Microsoft are poised for significant long-term growth due to their strategic positions in the AI ​​space, Microsoft offers the better investment opportunity today due to its superior valuation and monetization strategy. Even if Meta manages to develop the most advanced AI models, monetizing these capabilities could be more challenging compared to Microsoft’s established paths. Given the security and stability Microsoft offers, I prefer buying its shares while holding off on Meta for now.

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