Microsoft Vs Alphabet Stock: Which Is Best?

Microsoft Vs Alphabet Stock: Tech giants Microsoft and Alphabet are in constant competition to deliver the newest, most advanced technologies to consumers and businesses.

Innovation is ingrained into the culture of both companies, and both have been responsible for introducing transformative products and services that have upended the logistics of communication, collaboration, data storage, analysis, and more. 

Of course, big tech isn’t infallible. All of that innovation is expensive, and it’s never entirely clear which advances will make it into the mainstream. That means investors must walk a fine line between backing the next big advancement as early as possible and mitigating the risk that an expensive project will never actually result in profit. 

The question is, which company is most likely to see strong results? Many believe the answer comes down to either Microsoft or Google – but when it comes to Microsoft Vs Alphabet stock (the holding company for Google), which is best?

Pros and Cons of Investing in Big Tech

Technology companies were performing well when the novel coronavirus crashed the stock market, and they were some of the first to recover from the sudden drop.

As a group, these companies became indispensable in a world that suddenly went online. As employees began working from home, many for the first time, and consumers found themselves looking for diversions during quarantines, tech solutions kept everyone connected. 

In mid-July, the S&P 500 had a year-to-date daily total return of (-0.32 percent), but the Nasdaq was up 20 percent. This was primarily due to the Nasdaq’s high proportion of tech stocks.

Growth in this industry is expected to continue, even when people go back to the office. Though they might not have embraced digital tools and resources before the pandemic, it is likely that heavy use will continue now that the workforce has grown accustomed to digital options. 

The downside to investing in any tech company is short-term volatility. These shares tend to move up and down in value suddenly as a result of both internal and external factors.

For example, a change in regulations, association with a data breach, or concerns related to antitrust legislation have temporarily derailed companies. For investors, that means tech is best considered a long-term component of a balanced portfolio, understanding that historically, these shares have grown in value over time.

Is Microsoft Stock a Buy?

Microsoft is a technology pioneer, and it has long led the software industry in creativity and innovation. While it is best known for the Windows operating system, as well as Office software that includes Word, Excel, PowerPoint, and Access, Microsoft is rapidly expanding in the area of cloud computing infrastructure.

At the moment, Microsoft is second only to Amazon Web Services in terms of cloud computing market share, and it is gaining on its main rival. 

As an investment, Microsoft has a number of advantages over its competitors. For example, its market cap came in at an extraordinary $1.71 trillion as of late August. That’s second to Apple, at $2.14 trillion, and just a bit over Amazon.com at $1.70 trillion.

This massive market cap gives Microsoft strength that smaller companies simply can’t match. For example, Microsoft has a rock solid balance sheet allowing it to borrow at cheap rates, produces cash flow rapidly, and has a war chest of cash to pounce on new investment opportunities.

Better still, Microsoft belongs to the tiny group of companies that maintains a AAA credit rating with Moody’s. 

Other factors that land Microsoft solidly in the buy column include reliable, steady earnings increases – pandemic or no pandemic. This year, the company is forecast to generate an earnings increase of 12 percent, and next year, that figure might rise as high as 14 percent. 

Finally, Microsoft has paid a dividend since 2004, and the amount has gone up each year, with the exception of two. Payouts currently yield slightly under one percent at $2.04 per share, and the dividend payout ratio is a little more than 35 percent. The bottom line is that Microsoft is a buy – but it is a better choice than Alphabet?

Should You Invest in Alphabet?

The Google search engine became such a dominant force that its name is now used as a verb. You can say, “Let’s google it,” and everyone knows exactly what you mean.

Google rapidly expanded its business beyond its search engine, launching a variety of projects within the tech space but outside of its traditional internet environment.

Examples include the Android operating system for smartphones, mobile payment solutions, autonomous vehicles, drone-based delivery services, and more. 

Given the move away from its original core business, the decision was made to create a holding company. Alphabet was born and now serves as parent to Google Internet Services, Jigsaw, Sidewalk Labs, Waymo, and Wing, among others. 

In early July 2020, Alphabet’s market cap exceeded the $1 trillion mark, making it the fourth company to cross that threshold. That’s good for investors, because there is plenty of cash for the sort of research and development that will deliver the next breakthrough technology. 

Alphabet generates much of its revenue from the ad services offered through Google’s search engine. Some of that dried up in early 2020 because of the COVID-19 crisis.

As a result, this year’s earnings are projected to drop by about 10 percent, but the decline should be temporary.

Analysts project a 28 percent increase in earnings next year. Given those advantages, the consensus is that yes, you should invest in Alphabet. 

Alphabet Vs Microsoft Stock: The Bottom Line

If you must choose between Alphabet and Microsoft, Microsoft is a slightly better bet.

Its steady growth, dividend history, and success in the lucrative cloud computing space offer a bit more security as compared to Alphabet’s unproven – though potentially transformative – projects currently in development. 

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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.