Alphabet (GOOG 9.91%) (GOOGL 10.21%) and Microsoft (MSFT 1.86%) are on a collision course.
The release of OpenAI's ChatGPT prompted a "code red" at Google headquarters, and Microsoft, which is an investor and partner of OpenAI, is moving quickly to integrate OpenAI's technology across its products, including Azure, GitHub, and even Bing, according to reports.
The threat of a ChatGPT-powered Bing could upend Alphabet's search monopoly, and it's not surprising that the search giant is scrambling to come up with a strategy.
Alphabet CEO Sundar Pichai has been consulting with the company founders Sergey Brin and Larry Page, according to The New York Times, who no longer have day-to-day roles with the business but are the company's largest shareholders.
In response to the OpenAI threat, Google now plans to roll out more than 20 new artificial intelligence-driven products, as well as introduce a version of its search engine with its own chatbot features.
Alphabet has invested significantly in artificial intelligence (AI) over the last decade, including acquiring the AI lab DeepMind, and developing its own large language model, LaMDA, which reportedly has similar capabilities to ChatGPT.
Alphabet has been reluctant to deploy these AI tools because it says they aren't always accurate, but also because it doesn't want to disrupt its highly profitable search monopoly.
Image source: Getty Images.
The disruptor and the incumbent
More than half of Alphabet's revenue comes from Google Search, and it brings in an even higher percentage of its profits.
Alphabet's search monopoly has been a source of strength for the company, but having a majority of its profit come from one source also makes the company vulnerable, and the rise of ChatGPT has exposed that like never before.
The tech titan is stuck in the innovator's dilemma. Alphabet can either hold on to its search monopoly until an outside company disrupts it, or it can disrupt it itself, and either choice puts the business's profits at risk.
ChatGPT's text interface doesn't lend itself to advertising the way that a typical search engine does, with paid listings at the top of the search, and it's unclear how Alphabet might adapt its search engine to include chatbot features while maintaining its advertising ecosystem.
Microsoft, on the other hand, is playing loose and free here, making another investment in OpenAI that's rumored to be worth as much as $10 billion to give OpenAI more firepower and more tools that will be incorporated across Microsoft's vast ecosystem.
The stakes are high
Both companies believe that AI is the next major computing platform, and both said as much in their recent layoff announcements, explaining that they needed to cut costs and shift resources toward artificial intelligence.
Microsoft CEO Satya Nadella said on his company's recent earnings call that gaining a first-mover advantage was a top priority in AI, which is why it's investing billions in OpenAI and moving quickly to ramp up AI features in Azure, its cloud infrastructure business, and other products.
On the other hand, Pichai said Alphabet had pivoted to being AI-first years ago, and that it had hired during the pandemic for a different reality than it currently faces, needing to shift its focus to AI.
Which is the better big tech stock?
Alphabet is cheaper than Microsoft today, trading at a price-to-earnings ratio of 19 compared to Microsoft's 28, and that gap seems to reflect Alphabet's slowing revenue growth and falling profits, as advertising demand has been impacted by macroeconomic headwinds.
The threat from ChatGPT doesn't seem to have impacted Alphabet stock because shares are basically flat since it was introduced on Nov. 30, but even a successful defense from the company is likely to be expensive.
If the Google parent can fend off Microsoft and ChatGPT, and also continue generating bumper profits in search, the stock is likely to rebound, but Microsoft is the one playing offense right now.
Additionally, Microsoft's diversification across Windows, software like Office, and Azure, among other products, makes it less vulnerable to disruption and competition than Alphabet.
The competitive landscape between these two FAAMNG stocks could change significantly over 2023, but with OpenAI products ramping up and a ChatGPT-powered Bing search engine coming as soon as March, Microsoft has the upper hand. It's the better buy today.
