Alphabet (GOOG -1.10%) (GOOGL -1.23%) and Microsoft (MSFT -1.27%) have long been rivals, competing in areas like web browsers, email, productivity software, and operating systems, but it seems like Microsoft may be turning the tables on its old rival.
The launch of ChatGPT from OpenAI, Microsoft's strategic partner in which it's invested more than $10 billion, presents possibly the greatest threat ever to Google Search. In fact, Alphabet called a code red meeting in response to the AI chatbot, and brought back founders Larry Page and Sergey Brin to devise a strategy. Shortly after, Alphabet launched its competitor, Bard AI, though its reception was underwhelming.
With both companies preparing for AI to be the next major computing platform, which stock is the better buy today? Keep reading to see both sides of the debate and then make up your own mind.
Image source: Getty Images.
Alphabet's stock is selling at a bargain price
Parkev Tatevosian: Alphabet might be one of my favorite stocks to buy right now. The company is home to Google, the world's most dominant search engine.
Why is that important? Because so many purchase decisions start with an internet search. If merchants want to put their products and services in front of consumers' eyes, there are arguably few better places than in a relevant Google search query.
That position helped Alphabet boost its revenue from $66 billion in 2014 to $283 billion in 2022. As evidenced by the tremendous increase in sales, merchants are transferring a larger share of their advertising budgets toward Alphabet's properties, including YouTube, Gmail, and Google. While many tech stocks have shown an ability to grow sales over recent years, few can match Alphabet in profitability.
GOOG PE Ratio (Forward) data by YCharts
Indeed, Alphabet's operating income has soared from $16.5 billion in 2014 to $74.8 billion in 2022. Admittedly, the artificial intelligence engine ChatGPT has shown the potential to disrupt Alphabet's search business. However, the mere chance that it could take market share away from Alphabet has arguably moved Alphabet's stock meaningfully lower.
At a forward price-to-earnings of 18.4, investors would not be taking a considerable risk with Alphabet stock. If it turns out that Alphabet's revenue and profit growth continues, undisrupted by ChatGPT or other forces, investors could reap significant rewards.
The safest big tech stock
Jeremy Bowman: Every big tech company is struggling these days, as difficult comparisons from the pandemic boom and recessionary headwinds have caused revenue growth at companies like Microsoft and Alphabet to grind to a halt.
However, because of its diversification, Microsoft offers a level of diversity that no other tech giant can match. While Alphabet makes most of its revenue and profits from search, Microsoft has three operating segments, each of which brings in significant revenues. Those are led respectively by its office software suite, its Azure cloud infrastructure business, and its Windows operating system.
Microsoft is also diversified through businesses like LinkedIn, GitHub, and gaming, which is built around the Xbox. That gives Microsoft an advantage in challenging times, as it has a number of ways of generating profits, but it's also a key asset as big tech companies look to leverage the power of AI, including chatbots like ChatGPT.
Microsoft is incorporating ChatGPT into a broad range of its products, including Azure, its Edge browser, the Office software suite, and its Bing search engine. The Windows owner unveiled the new Bing in February, and the ChatGPT-powered search engine is currently only available to a select group of users. However, once it's released to the public, it could begin to gain market share on Google Search.
CEO Satya Nadella recognizes that this battle favors Microsoft over Google. He's said that Alphabet needs to defend every percentage point of market share, and that the margin in search will steadily fall as companies will need to invest more in AI capabilities.
Nadella has repaired Microsoft's reputation over the last decade and made smart moves, investing in Azure and opening up the Office suite and other Microsoft products to Apple users.
Betting against him and Microsoft's OpenAI partnership seems like a mistake, especially as these companies race to control the next computing platform.
