Category: Stock Market

If thinking about your retirement puts you in a panic, research shows you are not alone. According to State Street Global Advisors, only 20% of Australians surveyed expect to have enough saved to fund their desired lifestyle post-work.

Unfortunately, the despairing result is down from 25% in 2022. When asked about the cause for concern, 73% of Aussies named inflation and cost of living as the negative influences detracting from a more optimistic outlook.

However, I think a comfortable retirement is within reach of most people by leveraging a simple portfolio.

My $150 per week plan to confidently retire at 60

I’ll be using my circumstances throughout. However, anyone can adapt to their age by using an online compound interest calculator, such as Moneysmart’s, to change the timeline.

For me, I’m working on 32 years of compounding before turning 60 years old. Don’t be discouraged if you are much closer to 60. Heck, even if you’re 60, there’s no harm in starting now to build some financial cushion by 70.

The most important part of my plan is finding $150 per week, every week, to invest for the next 32 years. For some, this might be possible from their day-to-day income. Although, if I was short on cash — for whatever reason — there are plenty of ways to make $150 in a day.

My top pick at the moment is mowing lawns. It’s pretty straightforward work, using readily available tools, and can pay $55 per hour on average. Doing some extra work may not sound appealing, but if it means a comfortable retirement, I’m up for it.

I’d start by investing an upfront $10,000 accumulated through savings over the years. Approximately 70% would be invested in index-tracking exchange-traded funds (ETFs), such as the Betashares Australia 200 ETF (ASX: A200) and the Vanguard MSCI Index International Shares ETF (ASX: VGS) — the other 30% in high-quality ASX-listed companies that have the potential to grow for decades to come.

From here, I’d regularly invest $150 weekly into these ASX shares and ETFs. As shown above, this could compound to $1.164 million by the time I reach 60 (assuming an 8% per annum return).

Extending retirement without the worry

The hard part of earning and growing the retirement funds is done in this hypothetical scenario. So, how much might it improve our life outside the nine to five?

Well, it means roughly $77,600 per year before fees and taxes each year for 15 years, assuming no growth (or loss) — providing a comfortable lifestyle until I’m 75 years old. But the good times are not over yet.

See, building this additional fund with ASX shares would give my superannuation an additional 15 years to compound before use. According to my fund, that’s the difference between $493,000 at 60 and $844,000 at 75 — increasing my superannuation by 71%.

As a result, I’d have another $56,260 per year for another 15 years to spend. Only then, at the ripe old age of 100, will I have exhausted my retirement funds.

Sounds like a good life to me.

The post How I’d invest in ASX shares to unlock an extra $1.1 million for retirement appeared first on The Motley Fool Australia.

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More reading

• ASX 200 shares: A once-a-decade opportunity to get rich?
• Building a rock-solid base for my stock portfolio with these 3 ASX ETFs
• 2 of the best ASX ETFs to buy now
• These 3 top ASX ETFs just hit new all-time highs
• 5 top ASX ETFs for investors to buy in 2024

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard Msci Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Some experts are telling everyone who’ll listen that small-cap stocks are going to go gangbusters in 2024.

The reasoning is that they have underperformed compared to their larger cap sisters over the last two years as inflation and rising interest rates forced investors to flee for more conservative options.

But now with the tantalising prospect of rate cuts looming, it could be time for sweet revenge.

“The fundamental setup for small cap returns in 2024 is compelling,” the analysts at LSN said in a memo to clients.

“Valuations are attractive, the earnings outlook is robust, and tailwinds from an improved economic backdrop historically provide active small cap managers with outsized returns.”

They noted that even Australia’s sovereign wealth fund, the Future Fund, has started a new program to buy small-cap ASX shares. 

“ASX small caps have underperformed the ASX top 100 by 25% since August 2021 and are now trading at substantial discount, despite the outlook for significantly more earnings growth,” read the LSN memo.

“This has not gone unnoticed in capital markets with a recent flurry of M&A from financial investors and industry players taking advantage of the environment.”

How to grab a piece of the small-cap action

So, if you believe in this thesis, how do you take advantage?

Of course, you can buy ASX small caps directly. But that requires much research and due diligence, which is all the more harder with less information available to the public than the big businesses.

One shortcut might be to buy an exchange-traded fund (ETF) that invests in smaller ASX businesses.

As well as cutting down on the required research, such funds have the advantage of providing immediate diversification to potentially smooth out the volatility of individual stocks.

Here are four ETFs on the ASX that invest in small-cap equities:

Exchange-traded fund	Fee per annum	5-year return per annum (distributions reinvested)	Distribution yield
Vanguard MSCI Australian Small Companies Index ETF (ASX: VSO)	0.3%	9.89%	3%
VanEck Small Companies Masters ETF (ASX: MVS)	0.49%	5.16%	4.6%
iShares S&P/ASX Small Ordinaries ETF (ASX: ISO)	0.55%	5.89%	2.6%
Betashares Australian Small Companies Select Fund (ASX: SMLL)	0.39%	8.05%	3.7%

The post Which ASX ETFs could explode if small caps surge in 2024? appeared first on The Motley Fool Australia.

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More reading

• 3 ASX ETFs for growth investors to buy in January
• 3 ASX ETFs to buy after the Christmas break

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In 2023, I regretfully held some cash on the sidelines. The appetising ‘risk-free’ return on savings was a big reason why. However, my real returns on this cash pile came to an approximate 1% loss after inflation. Instead, I’m putting that lazy capital to work in 2024 by investing it where it may ward off wealth-eating inflation.

Where to invest $7,000 sitting in cash

There are plenty of deterrents to deploying my money into the share market right now — there always are. Most notably, there are the ever-present warnings from investment analysts, cautioning that now may not be the right time to buy.

I have no doubt the same views were being plastered across the headlines last year as well… and the year before that. Little was often said about the threat of losing 13% purchasing power between 2021 and today by holding cash, though.

On that note, here are three ASX stocks I plan to grow my money with this year.

ASX stock #1: Boring compounder

Propel Funeral Partners Ltd (ASX: PFP) is already my second-largest holding. Yet, if the Australian and New Zealand funeral operator delivers another result showing consistent business growth, I’ll be scooping up another $3,000 worth of shares.

In FY23, the company achieved revenue growth of 16% and a profit increase of 18.5%. Propel plans to release its first-half results for FY24 on 21 February. I expect growth to be somewhat weaker than the prior year due to smaller acquisitions. However, I’m pleased with management’s diligence approach to outlaying capital.

As outlined in my in-depth review, I’m confident Propel can consolidate the industry and reap the rewards over the long term.

ASX stock #2: Glamorous growth machine

How many ASX-listed retailers do you know that have tripled their revenue in six years? Harder still is maintaining profitability throughout the rapid growth. Lovisa Holdings Ltd (ASX: LOV) is a cheap jewellery retailer showing others how it can be done.

The opportunity here is in Lovisa continuing its successful expansion into regions outside Australia. While reaching maturity locally, the United States, Europe, and Asia offer ample runway to grow. For example, total sales in the US increased 78.1% in FY23.

Furthermore, Lovisa stated it was preparing to open its first stores in Vietnam and mainland China in November/December 2023.

This is where I intend to invest $2,000 in 2024. The only reason why I’m refraining from more is the balance sheet. Lovisa had an 81% debt-to-equity ratio in July 2023, which would usually nudge me to steer clear.

ASX stock #3: Energy squeeze

Lastly, I believe there is an upside to be captured in the energy sector over the next few years. Between conflicts erupting in energy-rich lands and climate targets still out of reach, I expect prices to rise much higher to incentivise increased supply.

I’m of the belief that more regions will turn to nuclear energy as a means of improving energy security and reducing emissions. While the price of uranium has nearly doubled in the space of a year, recent reports of impacted production could support further strength.

Admittedly, miners are not my specialty. As such, I plan to invest $2,000 into an exchange-traded fund (ETF) for some exposure. The one on my radar is the Betashares Global Uranium ETF (ASX: URNM), charging a 0.69% management fee.

The post ASX investors: Where I’d invest $7,000 in 2024 appeared first on The Motley Fool Australia.

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More reading

• Brokers say these ASX 200 growth shares can rise 25% to 30%
• There’s great value right now in the ASX 200, especially in stocks like this one
• Targeting a $53,000 second income starting with just $1,000 of savings?
• Up 100%: Are ASX uranium ETFs worth a look today?
• 3 high-growth ASX shares that could be worth $2 billion in 10 years — or sooner

Motley Fool contributor Mitchell Lawler has positions in Lovisa and Propel Funeral Partners. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa. The Motley Fool Australia has recommended Betashares Global Uranium Etf, Lovisa, and Propel Funeral Partners. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Since you’re reading The Motley Fool, the chances are you have some money to invest.

Even if that amount is as little as $10,000, you can have a decent go at setting up a nice stream of passive income for yourself.

The places you could end up using the power of ASX shares and compounding could surprise you.

Let me throw up a hypothetical using one particular stock:

A market darling tipped to go even further

MMA Offshore Ltd (ASX: MRM) is a stock that many experts are particularly fond of at the moment.

The business provides marine services to clients with sea-borne infrastructure such as oil and gas rigs.

With the world experiencing energy anxiety over the past couple of years since Russia invaded Ukraine, MMA Offshore has been going gangbusters.

Just since November alone, the stock has gained more than 54%.

Over the longer term, the MMA Offshore share price has rocketed 107% over the past five years.

According to CMC Invest, all five analysts that cover it reckon MMA Offshore is a strong buy.

Just four years to produce passive income

Past performance, of course, is never an indicator of the future. But we can use this track record to demonstrate how you could grow your $10,000 into a passive income generator.

The last half-decade of returns from MMA shares equate to 15.7% compound annual growth rate (CAGR).

Even if we round that down to 15%, a $10,000 investment could take you to $2,500 of yearly passive income very swiftly.

The “trick” is to keep saving money and add $100 to the nest egg each month.

At that rate, after four years, the MMA shares will amount to $23,482.

From then on, selling off the 12% gain each year would reap you $3,522.

That’s $3,500 of cash for no work.

Right now $10,000 will buy you 5,181 MMA Offshore shares.

So what are you waiting for?

The post $10,000 in excess savings? I’d buy 5,181 shares of this ASX stock to aim for $3,500 in passive income appeared first on The Motley Fool Australia.

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More reading

• I’d invest in these 2 ASX shares for a real shot at $1 million
• Up 140% in 13 months, experts are still backing this ASX stock for the long run
• Top ASX shares to buy in January 2024

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Mma Offshore. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The post Here are the top 10 ASX 200 shares today appeared first on The Motley Fool Australia.

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• These ASX 300 dividend shares offer major upside and good yields
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Motley Fool contributor Sebastian Bowen has positions in Endeavour Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Corporate Travel Management and Life360. The Motley Fool Australia has positions in and has recommended NIB Holdings. The Motley Fool Australia has recommended Bapcor and Corporate Travel Management. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Premier Investments Limited (ASX: PMV) shares are trading for $26.83 on Tuesday, up 0.47%.

ASX retail shares like Premier Investments have been volatile over the past 12 months, as investors fretted over high interest rates and inflation and the degree to which consumers would pull back on spending.

Premier Investments, the name behind popular retail brands like Just Jeans, Peter Alexander, and Smiggle, certainly experienced this volatility with its share price on a rollercoaster last year, as shown below.

Despite the economic uncertainty, the full-year performance of ASX retail stocks last year was actually surprising.

Over the year, the S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) rose by 18.7%.

Retail shares outperformed the S&P/ASX 200 Index (ASX: XJO) by a mile, with the benchmark rising by only 8.13% in comparison.

Meantime, the Premier Investments share price booked an 11.1% gain over the year.

Why did consumers keep spending in 2023?

Analysts speculated that low unemployment and higher spending among older debt-free Australians kept consumer discretionary spending stronger than anticipated in 2023.

Also, many households had a savings build-up of pandemic stimulus money that provided a buffer against the rising cost of living.

On top of that, property prices rose strongly last year. This creates a psychological ‘wealth effect’ whereby people feel richer when their homes rise in value, and thus, they are more likely to spend at the shops.

The big question is whether this retail resilience will continue in 2024. Those household savings are running out, and property price growth is expected to slow this year.

Plus, the Westpac-Melbourne Institute consumer confidence survey released this week found sentiment had fallen to the lowest level recorded for the first month of a new year since the 1990s recession.

So, are we yet to see the full impact of this cost-of-living crisis on retail businesses? Or will the prospect of cuts to interest rates prevent a downward spiral in retail earnings and a hit to dividends?

These are the questions that income investors may ponder before buying ASX retail shares in 2024.

Meantime, let’s take a look at Premier Investments shares and the dividend expected in 2024.

How much passive income will Premier Investments shares pay in 2024?

As published today on CommSec, the consensus forecast dividend for Premier Investments shares in 2024 is $1.21 per share.

This is down on the FY23 dividend of $1.30 per share and the FY22 dividend of $1.25 per share.

Let’s see how this translates for ASX investors purchasing $10,000 worth of Premier Investments shares at today’s price.

An investment budget of $10,000 (minus a brokerage fee of $5) buys you 372 Premier Investments shares at a total cost of $9,980.76.

If we multiply 372 by $1.21, we get a total annual dividend of $450.12, plus 100% franking.

The gross dividend, including the franking, equals $643.

On a purchase price of $26.83 per share, that brings the dividend yield to just over 4.5%.

If we add franking, the gross dividend yield comes in at just over 6.4%.

That means Premier Investments shares will still pay an above-average dividend yield this year.

The long-term average dividend yield for an ASX 200 stock is 4%.

The post If you invest $10,000 in Premier Investments shares, how much passive income will you receive in 2024? appeared first on The Motley Fool Australia.

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More reading

• ‘Short-term correction’: 2 ASX stocks I’d load up on if the market turns sour
• Here are the top 10 ASX 200 shares today
• 3 of the best ASX retail shares I can find right now, no soft landing required
• Why Opthea, Pantoro, Premier Investments, and Wildcat shares are falling
• 5 things to watch on the ASX 200 on Tuesday

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Premier Investments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Washington H. Soul Pattinson and Co Ltd (ASX: SOL) shares are famous on the S&P/ASX 200 Index (ASX: XJO). Soul Patts is the only ASX 200 share that can tell investors that they have enjoyed 23 years of uninterrupted annual dividend pay rises. Yep, Soul Patts shares have come with an ever-rising dividend since the year 2000.

And yet, this ASX 200 investing house doesn’t look like a dividend heavyweight at first glance. Right now, its shares have a trailing yield of 2.69% on the table. That’s fine, but nothing that will catch the eye.

But today let’s undertake an investigation into the power of a compounding dividend.

We’ll start by going back five years. At the start of 2019, Soul Patts shares were asking $26.17 each. That’s 23.7% away from the $32.37 those same shares are asking today.

Over 2019, Soul Patts would go on to fund two fully-franked dividend payments, as is the norm for the company. Those consisted of an interim dividend worth 24 cents per share and a final dividend worth 34 cents per share for a total of 58 cents per share.

Over the following years, Soul Patts kept to its habit of delivering annual dividend pay rises.

2020 saw the company fork out a total of 60 cents per share in dividend payments (despite the pandemic).

Then, in 2021, this was upped again to 62 cents.

2022 saw a huge increase in investor payouts, with a total of 72 cents per share doled out (as well as a special 15 cents per share dividend).

And that brings us to 2023. Last year, Soul Patts shares gave investors an interim dividend of 36 cents per share, in addition to a final dividend worth 51 cents per share. That’s a grand total of 87 cents per share.

How much are dividends from Soul Patts shares really worth?

So this streak of dividend hikes is obviously impressive. But how much exactly is it worth to Soul Patt investors? Well, let’s assume that an investor picked up $10,000 worth of Soul Patts shares back at the beginning of 2019. At that share price of $26.17, this would have resulted in the acquisition of 382 shares, with some change left over.

Over 2019, this investor would have enjoyed a total of $221.56 in dividend income. That translates to a yield cost of around 2.22%.

But over 2020, that same investor would have bagged $226.20 in dividends.

By 2021, it would have been $236.84, and by 2022, $275.04 ($332.34 including the special dividend).

2023 would have yielded the same figure for our investor – $332.34.

As such, we can conclude that our investors’ annual dividends have risen from $221.56 to $332.34 over a five-year period. That’s a rise worth 50%.

What’s more, it means that at the end of 2023, our investor is enjoying a yield-on-cost of 3.32% on their original investment, not the 2.22% they started with.

As a result, their 382 Soul Patts shares, which cost just under $10,000, would be worth $12,365.34 today. In addition, our investor has enjoyed a total of $1,349.38 in total dividend payments. That stretches their total gain to $3,714.62.

Not a bad return for five years.

The post Rivers of cash: Here’s how much Soul Patts shares have paid out in dividends since 2019 appeared first on The Motley Fool Australia.

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More reading

• 3 ASX shares I think are ready for dividend hikes in 2024
• Top ASX passive income shares to buy in January 2024
• This is the ASX 200 share I’m expecting to buy loads of in 2024
• Revealed: My 5 best ASX share investments of all time
• If I inherited $100,000, these are the ASX shares I’d buy for passive income

Motley Fool contributor Sebastian Bowen has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you want to add to your income portfolio this month, then it could be worth checking out the ASX 300 dividend shares listed below.

That’s because analysts are currently tipping them as buys and forecasting good yields.

Here’s what they are saying about them:

Accent Group Ltd (ASX: AX1)

The team at Bell Potter thinks income investors should be buying Accent Group’s shares.

It is a retail conglomerate with a focus on the footwear market. Its portfolio includes a large number of store brands such as The Athlete’s Foot, Stylerunner, HypeDC, Platypus, and Sneaker Lab.

Bell Potter believes the company is well-positioned for growth over the long term. As a result, it is tipping Accent as an ASX 300 dividend share to buy with a $2.50 price target.

As for dividends, the broker is forecasting fully franked dividends per share of 11.8 cents in FY 2024 and then 13.7 cents in FY 2025. Based on the latest Accent share price of $2.04, this will mean yields of 5.8% and 6.7%, respectively.

Endeavour Group Ltd (ASX: EDV)

Over at Goldman Sachs, its analysts continue to believe that drinks giant Endeavour could be an ASX 300 dividend share to buy.

Its analysts highlight that the BWS and Dan Murphy’s owner’s shares trade “at an attractive 16.9x FY24 P/E vs 5.2% EPS 23-26e CAGR for a staple with clear market leading position.” It has a buy rating and $6.40 price target on the company’s shares.

In addition, Goldman is forecasting some good dividend yields in the coming years. It is predicting fully franked dividends of approximately 21 cents per share in FY 2024 and 23 cents per share in FY 2025. Based on the current Endeavour share price of $5.38, this equates to yields of 3.9% and 4.3%, respectively.

Transurban Group (ASX: TCL)

A third ASX 300 dividend share that analysts have named as a buy is Transurban.

It manages and develops a high-quality portfolio of 22 urban toll roads across Australia and North America. This includes CityLink in Melbourne and the Cross City Tunnel in Sydney.

Citi is a fan of the company. This is partly due to inflation-linked price increases and its defensive qualities. The broker has a buy rating and $15.90 price target on its shares.

As for income, Citi is expecting dividends per share of 63.4 cents in FY 2024 and 64.6 cents in FY 2025. Based on the current Transurban share price of $13.13, this will mean yields of 4.8% and 4.9%, respectively.

The post These ASX 300 dividend shares offer major upside and good yields appeared first on The Motley Fool Australia.

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More reading

• Forget savings accounts and buy these ASX dividend shares
• Top ASX shares for beginner investors to buy in 2024
• Brokers say these ASX dividend shares are buys
• I could generate an extra $200 a month by buying 21,622 shares of this ASX dividend stock
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor James Mickleboro has positions in Endeavour Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group and Transurban Group. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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ASX lithium shares are starting the year swirling in a pool of pessimism following an 80% decline in the lithium carbonate price last year.

Not only that, but top broker Goldman Sachs reckons lithium commodity prices won’t bottom until 2025.

Despite this gloomy backdrop, several directors of two beaten-up ASX lithium micro-caps are ploughing more of their own investment funds into their companies this week.

Which directors are buying ASX lithium shares?

Patrick Murphy, a non-executive director of lithium explorer Green Technology Metals Ltd (ASX: GT1), is our first buyer.

Murphy snapped up 362,610 shares on-market over three days in late December and early January. The series of trades cost him a little over $100,000 at an average price of 27.6 cents.

And he’s not the only director buying.

Last month, Cameron Henry also bought 386,148 Green Technology shares for close to $100,000 on-market. He paid an average of 25.9 cents per Green Technology share.

John Young also bought 750,000 shares over two days on-market at an average price of 26.1 cents for a total investment of $196,196.

The buys followed a capital raise in December that raised $14.6 million through the issue of 39,477,680 new shares at 37 cents per share.

The Green Technology share price is currently 19 cents, down 5% for the day. There is no official news relating to the ASX lithium share today.

ASX lodgements also reveal that two directors of Nova Minerals Ltd (ASX: NVA) have also been buying up more shares.

Chris Gerteisen spent just over $15,000 buying 45,000 Nova Minerals shares this week at an average price of 33.8 cents.

The notice also revealed that he let 500,000 unquoted director options expire on 29 December. They were exercisable at 75 cents per share.

Also this month, Craig Bentley bought 200,000 Nova Minerals shares for a tad under $68,000. That’s an average price of 33.9 cents per share.

The Nova Minerals share price is currently 33 cents, up 1.54% for the day. There is no news from the company today.

The post 2 beaten-up ASX lithium shares being bought up by directors appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The launch of OpenAI’s ChatGPT in November 2022 triggered a boom in artificial intelligence (AI), with countless tech firms pivoting their businesses toward the budding industry.

According to Grand View Research, the AI market is projected to expand at a compound annual growth rate of 37% through 2030. That trajectory would see the sector exceed a value of $1 trillion before the end of the decade, suggesting there’s no better time than the present to invest in AI-minded companies.

Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN) are two attractive options, with both companies investing heavily in the market and active in one of the biggest growth areas of AI: cloud computing. These companies have emerged as some of the biggest threats in the industry and could deliver significant gains over the long term.

So, let’s take a closer look at these companies and determine whether Microsoft or Amazon is the better AI stock right now.

Microsoft

Microsoft was an early investor in AI, sinking $1 billion into OpenAI in 2019. The company has since increased its investment, achieving a 49% stake in the start-up. The partnership with OpenAI has granted Microsoft exclusive access to some of the most advanced AI models, which it has used to bring upgrades across its product lineup.

Over the last year, elements of ChatGPT have been integrated into Microsoft’s search engine Bing, a range of new AI tools have been added to its cloud platform Azure, and its various Office services now offer improved productivity with the help of AI.

Microsoft is a behemoth in the tech world, with millions of consumers and businesses relying on its software. The popularity of its services and OpenAI’s tech could be a powerful combination over the long term.

In the first quarter of 2024 (ending September 2023), Microsoft posted 13% in year-over-year revenue growth, beating Wall Street estimates by nearly $2 billion. Significant gains came from the company’s cloud and productivity segments, which saw revenue rise 19% and 13%, respectively. These divisions are hyperfocused on AI development, which appears to be paying off.

Alongside free cash flow that hit $63 billion last year, Microsoft is on a promising growth path. The company has the brand power and financial resources to become one of the biggest threats in AI.

Amazon

Amazon pulled off an impressive turnaround in 2023 after its stock plunged roughly 50% the year before. Since last January, its shares have soared over 62% thanks to a return to profitability in its e-commerce business and significant potential in AI.

Over the last year, various cost-cutting measures have seen Amazon’s free cash flow skyrocket 427% to $16 billion. The company has restructured its business to prioritize profit growth and is, therefore, investing heavily in its most profitable division: Amazon Web Services (AWS).

The cloud platform is responsible for over 62% of Amazon’s operating income despite earning the lowest revenue out of its three segments. In Q3 2023, AWS achieved nearly $7 billion in profits, representing growth of 29% year over year.

The cloud market is expanding quickly, boosted by the emergence of AI. Businesses are increasingly looking for ways to boost efficiency with the help of AI and turning to cloud services to do so. Meanwhile, AWS’ leading 32% market share in cloud computing positions it well to see big gains as AI develops.

Amazon’s dominant position in cloud computing makes the company one of the best ways to invest in AI.

Is Microsoft or Amazon the better AI stock?

Microsoft and Amazon have emerged as two of the biggest names in AI over the last year. These companies have similar potential in the industry thanks to booming cloud businesses and lucrative opportunities in other areas of tech.

As a result, the best way to determine the better AI stock is to consider which is trading at a better value.

Data by YCharts. PS Ratio = price-to-sales ratio. PEG Ratio = price-to-earnings-to-growth ratio.

This chart compares Amazon and Microsoft’s price-to-sales (P/S) and price-to-earnings-to-growth (PEG) ratios. These are helpful valuation metrics as they take into account a company’s financial health against its stock price.

P/S is calculated by dividing a firm’s market cap by its revenue. Meanwhile, PEG divides a stock’s price-to-earnings ratio by the growth rate of its earnings. For both metrics, the lower the figure, the better the value.

In this case, Amazon’s stock is a bargain compared to Microsoft. So, if you’re between these two AI stocks, Amazon is the better buy this month and a screaming buy at the start of 2024. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Better AI stock: Microsoft vs. Amazon appeared first on The Motley Fool Australia.

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Dani Cook has no position in any of the stocks mentioned. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon and Microsoft. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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