The battle for tech supremacy in the AI market is heating up in 2023. In January, Microsoft (MSFT -0.80%) extended a multi-year, multibillion-dollar investment in OpenAI's ChatGPT, a chatbot capable of delivering human-like responses thanks to its use of artificial intelligence. Alphabet (GOOGL +0.64%)(GOOG +0.21%) followed with the unveiling of its own AI-powered chatbot, Bard, in February.
But Bard failed to impress when it incorrectly answered a question during a promotional video, leading Alphabet's stock to lose $100 billion in market value after Bard's debut. This outcome illustrates how important a tech company's AI proficiency has become to its stock.
Microsoft and Alphabet's AI moves in the first quarter make now a good time to examine how they employ AI today. This insight can help determine which makes a better long-term investment.
Microsoft's AI use
Microsoft leadership views AI as critical to the company's future. CEO Satya Nadella called AI "the next major wave of computing." He intends Microsoft "to lead in the AI era, knowing that maximum enterprise value gets created during platform shifts."
NASDAQ: MSFT
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The tech giant uses AI most prominently in business-to-business offerings. These include its Azure cloud computing service, cybersecurity where AI is used to quickly identify threats, and a new supply chain platform that employs AI to predict and manage disruptions for businesses such as Kraft Heinz.
OpenAI utilizes Microsoft's cloud infrastructure to train its AI solutions, including ChatGPT. In fact, ChatGPT is made available through Microsoft's Azure to other companies looking to integrate the chatbot's capabilities.
Microsoft's AI approach is contributing to revenue growth. In its fiscal second quarter, ended Dec. 31, 2022, Microsoft's cloud revenue was up 22% from the prior year to $27.1 billion.
In the first half of fiscal 2023, Microsoft's cloud revenue was $52.8 billion, up from $42.9 billion in the prior year. This continues the double-digit revenue growth seen in the company's 2022 fiscal year, ended June 30, when Microsoft cloud revenue rose 32% year over year.
AI at Alphabet
While Microsoft's AI efforts lean more toward business applications, Alphabet's AI use favors its consumer products, such as its Google search engine, helping Google achieve a 96% market share in mobile search. So while the Bard debut may have been a disappointment, it's far from representative of Alphabet's AI use.
Google leverages AI to provide new ways for people to search online. For instance, its visual search feature, Google Lens, allows searches based on an image, and AI is employed to understand that image and translate any related text, such as a photo of a restaurant menu in a foreign language.
NASDAQ: GOOG
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Another example is YouTube. As the biggest online video service in the world, receiving more monthly visitors than Facebook, Instagram, Twitter, and Amazon combined, YouTube relies on AI to effectively manage its vast content. AI is used to identify videos violating its policies, such as spam, and was responsible for finding nearly 95% of content removed in Q3 of 2022.
Alphabet also incorporates AI into its Pixel mobile devices, and in the company's advertising products. The latter is particularly important, driving $59 billion of Alphabet's $76 billion in fourth-quarter revenue.
An example of AI's use in advertising is Alphabet's Performance Max product. This offering enables an advertiser to efficiently manage advertising across Google's many properties, such as its search engine, maps, and email by leveraging AI and other automation technology to optimize ad performance.
Choosing between Alphabet and Microsoft
Despite Alphabet's AI use, Q4 ad revenue declined from $61.2 billion in 2021 to $59 billion in 2022. Amid a macroeconomic environment of high inflation, the advertising industry is in a downturn, which has continued into 2023. But over the long term, Alphabet's ad revenue should grow since global spending on digital ads is forecasted to increase from $602 billion in 2022 to $876 billion by 2026.
Moreover, Alphabet's financial health is excellent. The company exited Q4 with $365.3 billion in total assets while total liabilities were $109.1 billion. Its Q4 free cash flow (FCF) was $16 billion. Contrast this to Microsoft's fiscal Q2's FCF of $4.9 billion.
But Microsoft's financials are strong as well. At the end of its fiscal Q2, the company possessed $364.6 billion in total assets compared to $181.4 billion in total liabilities.
Given the key role AI plays in both companies' solutions, and the strong financial health of each, an investor should ideally invest in both companies. The global AI market is forecasted to grow from $142.3 billion in 2022 to $1.8 trillion by 2030. This provides a large enough market for both Alphabet and Microsoft to share success in the AI field.
Yet if you had to choose only one company to invest in, Microsoft holds the edge. It is the second-largest cloud solutions provider on the planet, behind only Amazon, a strong incentive for Microsoft's business clients to remain customers. Microsoft also pays a dividend, which it has consistently increased for 20 years, while Alphabet offers no dividend. These factors tip the balance in Microsoft's favor as the better stock to own in the AI arms race.
