Alphabet Stock vs Microsoft: Which AI Will Win?

Alphabet Stock vs Microsoft: The world is witnessing an unprecedented rise in the development and application of artificial intelligence (AI) technology.

From self-driving cars to virtual assistants, artificial neural networks and machine learning algorithms have made significant strides in transforming how we live our lives.

But with the increasing demand for AI-powered products and services, the efforts by companies to gain an upper hand in this battle have never been more consequential.

Indeed, the rivalry between two of these businesses – Microsoft and Google – has only intensified. The competition reached a fever pitch earlier this year when OpenAI unveiled its disruptive chatbot application, ChatGPT, a natural language processing (NLP) model that’s revolutionizing the field of generative AI.

Although Alphabet has been a major force in the advancement of artificial technology in recent years, it appears that, with the well-publicized success of ChatGPT, the company is now playing catch-up.

In fact, despite owning some of the most important AI businesses in the space right now – including DeepMind and Waymo – GOOGL’s dominance in the field could be eclipsed.

For example, Microsoft is formalizing its relationship with OpenAI by investing a further $10 billion in the company. This will help it deploy the research laboratory’s innovations in introducing new categories of digital experiences.

As the long-standing feud between Google and Microsoft shows no signs of slowing down, the question on everyone’s mind is which tech giant will emerge victorious.

Could it be Alphabet who comes out on top? Or will Microsoft – helped along by a hungry, agile challenger – ultimately seize the throne? Read on to find out.

Alphabet

It’s rare for Google to lose $100 billion’s worth of value in just one day. It’s even stranger for such a loss to come at the hands of a humble web bot.

And yet, that’s what happened when Alphabet introduced Bard, its newest AI offering, in what should have been an auspicious opening to the international conglomerate’s assault on ChatGPT’s coming dominance.

However, something went very amiss. The “experimental conversational service” gave a wrong answer to a fairly basic question about the James Webb Space Telescope, with seasoned astronomers quickly pointing out the error on Twitter.

While a high-profile failure like this might have been embarrassing for GOOGL, it prefigures a more serious problem for the company today.

For instance, Alphabet’s search business accounts for 57% of its total revenues. That percentage is even higher for operating income, given the firm’s other segments are currently loss-making.

This lack of diversification in revenue mix is bad enough. Still, factor in that MSFT is now a serious contender to knock Google off its search engine perch, and the situation resembles one of crisis, or “code red” as it was described internally.

That said, Alphabet isn’t the world’s fourth-largest company for nothing – and the firm still has enough irons in the fire to make it a compelling proposition. Its Google Cloud revenue was up a massive 33% in the last quarter, growing from $5.5 billion to $7.3 billion year-on-year.

Moreover, with products like Vertex AI – which provides “infrastructure and tools for developers and data scientists” – the firm remains relevant with those driving the artificial intelligence renaissance forward.

Microsoft

Aside from its huge potential with the rollout of ChatGPT, Microsoft likewise boasts a number of other growth catalysts that will spur its share price upwards in the future.

To begin with, MSFT is second only to Amazon in the global cloud services sector. And yet, despite the segment representing $27.1 billion of the company’s $52.7 billion total revenue, the business grew a whopping 29% in constant currency in the second quarter of fiscal 2023.

Furthermore, unlike Alphabet’s reliance on the search side of its operations, Microsoft enjoys extremely differentiated revenue streams. For example, it receives cash from its Office Commercial and Consumer products, LinkedIn, Intelligent Cloud services, Xbox content, and Windows OEM, to name but a few.

Additionally, Microsoft’s sprawling ecosystem of products doesn’t just make the company more diversified than Alphabet – it also allows the organization to leverage the benefits of any advances in AI across a vast array of commercially-viable ventures.

Indeed, as the firm’s chairman and chief executive officer, Satya Nadella, said at the time of the last earnings release, this permits MSFT customers “to do more with less” – a vital freedom much prized in an era of austerity and cutbacks.

MSFT or GOOGL: Which One To Buy?

With the NASDAQ Technology Sector tanking 32% in 2022, IT companies have rarely been so cheap. But cheap doesn’t always imply value, and that seems to be the case with Alphabet and Microsoft.

For example, GOOGL trades at a forward non-GAAP price-to-earnings ratio of 18.1, with annual revenue growth of 9.78% and a trailing twelve-month (TTM) EBITDA margin of 32.1%.

However, although MSFT’s earnings multiple is a lot steeper – at 26.8 – its top line is expanding at 10.4%, while EBITDA is superior too with a margin of 41.0%.

Microsoft is also more attractive when it comes to another measure of profitability. Its TTM return on total capital of 20.8% is noticeably better than Alphabet’s 16.5%. This is a salient metric because it demonstrates how well a business generates profits from its invested capital.

Despite these differences, it doesn’t mean that Google and MSFT aren’t equally good investments. On a one-on-one basis, Microsoft might just edge it – but each company represents a solid addition to practically anyone’s portfolio.

Indeed, Alphabet’s business moat alone firmly upholds the buy thesis. The firm owns the Android operating system, meaning it can set its products as the default on every device that runs the software. Furthermore, YouTube is the largest video-sharing platform in the world and accounts for around a quarter of global mobile traffic.

And the same goes for Microsoft. Its well-known brand – and economies of scale – enable it to fully exploit its potent network effects, and Office 365 is used by more than one million companies worldwide.

So, whichever business you ultimately prefer, Microsoft and Google are two stocks that will reward you for a very long time to come.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.