Better AI Stock: Microsoft vs. Alphabet | The Motley Fool (2024)

Microsoft (MSFT 2.22%) and Alphabet (GOOG 0.32%) (GOOGL 0.37%) are two of the world's most well-known tech companies. Microsoft owns Windows, Office, and Azure -- the world's second largest cloud infrastructure platform after Amazon (AMZN 0.81%) Web Services (AWS). Its Xbox business also makes it a leading video game company, it sells its own Surface PCs, and its Bing search engine gives it a firm foothold in the search and advertising markets.

Alphabet's Google owns the world's largest search engine, mobile operating system, web browser, webmail platform, and streaming video platform. Its Google Cloud Platform (GCP) is also the world's third largest cloud infrastructure platform.

Microsoft and Alphabet operate different business models, but both companies have significantly ramped up their investments in the artificial intelligence (AI) market in recent years. Which of these tech giants is a better play on that secular trend?

Microsoft's big investments in OpenAI are paying off

Five years ago, Microsoft invested $1 billion in OpenAI, a developer of generative AI tools. It invested another $10 billion in the company last year, shortly after the initial launch of its ChatGPT chatbot. It also secured a non-voting observer seat on OpenAI's board last November after an internal conflict led to the brief firing and reinstatement of its CEO Sam Altman.

Microsoft officially refers to OpenAI as its "strategic partner", but it's been directly integrating the start-up's generative AI tools into Azure, Office, Bing, and Windows to automate, accelerate, and analyze certain tasks.

Those AI upgrades are enabling Azure -- the core growth engine of the Intelligent Cloud business which generate 43% of its revenue in its latest quarter -- to grow faster than AWS and GCP. Its "Azure and other cloud services" revenue rose 31% year over year in the third quarter of fiscal 2024 (which ended on March 31), accelerating from its 30% growth in the second quarter and 29% growth in the first quarter.

The rapid expansion of Microsoft's cloud and AI businesses is offsetting the slower growth of its PC, gaming, and enterprise-facing software businesses. Its operating margins still expanded year over year in the first nine months of fiscal 2024, even as it scaled up its AI infrastructure and integrated its recent acquisition of Activision Blizzard.

Analysts expect Microsoft's revenue and earnings to grow 15% and 19%, respectively, in fiscal 2024 (which ends this June). For fiscal 2025, they expect its revenue and earnings to increase 14% and 15%, respectively.

Alphabet's AI efforts are off to a rockier start

Alphabet's Google developed plenty of machine learning and AI algorithms to process the massive amounts of data across its ecosystem, but it's arguably falling behind Microsoft in the generative AI race. Google had been developing its own large language model (LLM) called LaMDA, but it wasn't publicly available when OpenAI's ChatGPT arrived in late 2022.

ChatGPT's launch drove Google to accelerate its development of LaMDA and roll out its own generative AI chatbot called Bard in early 2023. It subsequently merged Bard with its Duet AI assistant to create the unified Gemini platform.

Gemini wasn't as warmly embraced as ChatGPT, and Google suspended its image generation tools earlier this year after it generated historically inaccurate pictures. Many critics also claimed it was trained with left-leaning biases.

But like Microsoft, Google also integrated Gemini into GCP, and that closely watched business is generating accelerating growth. In the first quarter of 2024, Google Cloud's revenue increased 28% year over year, accelerating from its 26% growth in the fourth quarter and 22% growth in the third quarter. However, Google Cloud is still significantly smaller than Azure and only generated 12% of Alphabet's total revenue in the first quarter.

Alphabet still generates most of its revenue from Google's advertising business, which recovered over the past year as the growth of YouTube and its search-based ads offset the stagnant growth of its advertising network. It's also been locking more users into its YouTube Premium and Music subscriptions to diversify its business away from macro-sensitive ads.

Alphabet is more of a digital advertising company than a cloud and AI one, but its operating margins still expanded year over year in 2023 and the first quarter of 2024 as it trimmed its workforce and streamlined its spending. Analysts expect its revenue and earnings to grow 11% and 18%, respectively, in 2024.

The better AI play: Microsoft

Microsoft trades at 30 times forward earnings, while Alphabet has a slightly lower forward multiple of 25. However, I believe Microsoft deserves its higher valuation for four reasons: it's growing faster, its better diversified, its AI ambitions are clearer, and it generates more cloud revenues than Alphabet. Those strengths make Microsoft the better AI growth play right now.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Better AI Stock: Microsoft vs. Alphabet | The Motley Fool (2024)


Better AI Stock: Microsoft vs. Alphabet | The Motley Fool? ›

Microsoft trades at 30 times forward earnings, while Alphabet

Alphabet is mainly owned by institutional investors, who own over 60% of shares. The founders Larry Page and Sergey Brin are each controlling around 3% of all shares, but are controlling with other insiders the majority of voting shares. › wiki › Alphabet_Inc
has a slightly lower forward multiple of 25. However, I believe Microsoft deserves its higher valuation for four reasons: it's growing faster, its better diversified, its AI ambitions are clearer, and it generates more cloud revenues than Alphabet.

What is the top AI stock to buy now? ›

7 best-performing AI stocks
TickerCompanyPerformance (Year)
NVDANVIDIA Corp211.78%
PRCTProcept BioRobotics Corp123.99%
UPSTUpstart Holdings Inc84.67%
AVAVAeroVironment Inc.79.22%
3 more rows
May 9, 2024

Does Motley Fool stock advisor tell you when to sell? ›

Yes, The Motley Fool will tell you when to sell a stock. Over these 8 years they have issued 18 sell recommendations. Four of these sell orders have been because the companies were being acquired and they recommended selling to get the cash out.

Is Alphabet a good AI stock? ›

Alphabet has cash to spend on AI hardware

That's all fine and well, but the real story here was the operating income profit margin, which increased from 25% in Q1 2023 to 32% in Q1 2024. The result was a massive 47% increase in operating profit to $25.5 billion, and 62% surge in earnings per share (EPS).

Is it worth investing in alphabet? ›

Alphabet currently has an average brokerage recommendation (ABR) of 1.34, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.)

What is Motley Fool's top AI stock? ›

The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

What are the top 3 artificial intelligence stocks? ›

Compare the best AI companies
Company (Ticker)SectorMarket Cap
Nvidia (NVDA)Technology$2.24T (AI)Technology$2.91B
Meta Platforms (META)Communication services$1.21T
Data accurate as of May 10, 2024
2 more rows

What are Motley Fool's double down stocks? ›

"Double down buy alerts" from The Motley Fool signal strong confidence in a stock, urging investors to increase their holdings.

What is the 3-5-7 rule in trading? ›

The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

Which stock is better Microsoft or Alphabet? ›

From my seat, it all comes down to valuation. Alphabet trades at a price-to-earnings ratio (P/E) of 25.4, which is right around the market average. Microsoft is at a premium P/E of 36, much higher than Alphabet's.

Is Alphabet a buy or a sell? ›

Alphabet Class A's analyst rating consensus is a Strong Buy. This is based on the ratings of 38 Wall Streets Analysts.

Is Microsoft heavily invested in AI? ›

The US$2.9 billion commitment is Microsoft's single largest investment in its 46-year history in Japan, also the site of its first international office. It effectively doubles the company's existing financial commitment to expand its AI and cloud infrastructure across Japan.

Is Alphabet or Amazon a better investment? ›

Alphabet's significantly lower figures suggest its stock currently offers more value and is a bargain compared to Amazon's. Alphabet has been slightly overshadowed in AI by peers like Amazon and Microsoft in 2023.

Is Alphabet a good long-term stock? ›

Fair Value Estimate for Alphabet

With its 3-star rating, we believe Alphabet's stock is fairly valued compared with our long-term fair value estimate of $179, which implies an enterprise value of about 13.5 times our 2024 adjusted EBITDA estimate, which excludes share-based compensation.

Is Microsoft a good stock to buy? ›

With its 3-star rating, we believe Microsoft's stock is fairly valued compared with our long-term fair value estimate of $420 per share, which implies a fiscal 2024 enterprise value/sales multiple of 12 times, adjusted P/E multiple of 36 times, and a 1% free cash flow yield.

Which company is number 1 in AI? ›


Which company is leading AI? ›

Largest AI companies by market cap as of May 2024:

Microsoft. Alphabet. NVIDIA. Meta Platforms (Facebook)

What is the best AI penny stock to buy? ›

If you're still up for the challenge, these are the AI penny stocks to consider.
  • Rekor Systems (REKR) Source: Al Serov / ...
  • Inuvo (INUV) Source: possible. ...
  • Predictive Oncology (POAI) Source: Shutterstock.
Apr 24, 2024

Which is the best AI model for stock prediction? ›

Sentiment Analysis

AI's ability to analyze sentiment in news articles, social media, and financial reports can be a game-changer in predicting stock movements. Natural language processing (NLP) algorithms can assess the sentiment behind news headlines and social media discussions related to specific stocks.

Top Articles
Latest Posts
Article information

Author: Dean Jakubowski Ret

Last Updated:

Views: 5598

Rating: 5 / 5 (50 voted)

Reviews: 81% of readers found this page helpful

Author information

Name: Dean Jakubowski Ret

Birthday: 1996-05-10

Address: Apt. 425 4346 Santiago Islands, Shariside, AK 38830-1874

Phone: +96313309894162

Job: Legacy Sales Designer

Hobby: Baseball, Wood carving, Candle making, Jigsaw puzzles, Lacemaking, Parkour, Drawing

Introduction: My name is Dean Jakubowski Ret, I am a enthusiastic, friendly, homely, handsome, zealous, brainy, elegant person who loves writing and wants to share my knowledge and understanding with you.