Artificial intelligence (AI) is advancing at breakneck speed. The cutting-edge technology threatens to disrupt massive industries while creating entirely new ones.
Alphabet (GOOGL 0.69%) (GOOG 0.56%) and Microsoft (MSFT -0.66%) know this, so they're waging a battle for AI supremacy. To the victor -- and its shareholders -- go the spoils.
ChatGPT mania takes hold
Microsoft created quite a stir in late January when it announced a multibillion-dollar investment in OpenAI, the creator of the wildly popular the AI-powered application ChatGPT. OpenAI is a leader in generative AI, which uses algorithms to create content such as text, images, and audio.
OpenAI created ChatGPT to enable users to interact with its AI models in a conversational manner. The technology caught on like wildfire. People are using it to write books, software code, and even music. ChatGPT has already gained over 100 million users since its public debut in November, making it the fastest-growing app of all time.
Microsoft is moving quickly to integrate OpenAI's tech into its products and services. Microsoft Teams is using OpenAI's models to automatically generate meeting notes, transcripts, and recommended tasks. The company's latest Windows operating software makes it fast and easy to use ChatGPT-like AI features. And Microsoft is reportedly planning to add AI capabilities to its popular Office suite of productivity tools.
Yet investors are even more excited about Microsoft's plans to transform the internet search market with a new AI-fueled version of its Bing search engine. By deploying a next-generation OpenAI model -- one that's even more powerful than ChatGPT -- Microsoft intends to provide more-relevant and complete answers to users' questions in a convenient, chat-like experience. The new Bing's mission is clear: Wrestle away market share from the current search king, Google.
Alphabet's stumble
Alphabet has long understood the power of AI, both as a potential growth driver and as a worrisome threat to its search dominance. CEO Sundar Pichai began to transform the tech titan into an "AI-first company" back in 2017. Google has invested heavily in AI since then, and it's widely believed to have some of the best technology in this rapidly expanding arena.
Yet following some high-profile setbacks, Pichai chose to take a more cautious approach to the company's AI strategy. Google's executive team was concerned about the reputational risk the search giant could suffer if it rolled out its AI tools before they could be trusted to be accurate. That allowed upstarts like OpenAI to be first to market.
However, after ChatGPT went viral, Pichai faced intense pressure to respond. He decided to debut Google's AI chatbot, Bard, in early February. But an advertisement for Bard showed the chatbot providing an incorrect answer to a user query. Investors took the mistake as a sign that Google's AI was not ready for prime time and rushed to sell Alphabet's stock. The tech conglomerate would go on to lose more than $100 billion in market value.
Which stock is the better buy today?
Some analysts believe the decline in Alphabet's market cap is an overreaction driven by short-term-minded traders. But others see it as acknowledgment from investors that Google now faces a credible threat to its search dominance for the first time in over a decade -- and that the combination of Microsoft and OpenAI is not to be taken lightly.
There's a $200 billion global search market at stake, one from which Alphabet still generates the lion's share of its profits. Microsoft, meanwhile, has a far smaller share of this industry -- roughly 3%, compared to over 93% for Google, according to StatCounter, which analyzes web traffic -- but it is intent on using its AI prowess to become a much more formidable force in search. The risks of this battle are thus skewed: It's nearly all upside for Microsoft and nearly all downside for Google.
Therefore, investors seeking to limit their risk while preserving their ability to profit from the incredible potential of AI would be better served by buying Microsoft's stock today.
