The battle for artificial intelligence (AI) supremacy escalated a few months ago with Microsoft (MSFT 1.11%)-backed OpenAI releasing ChatGPT, and it quickly gained immense popularity. The highly praised chatbot racked up a massive base of 100 million users within just two months of launch, leaving other technology giants to speed up their AI initiatives in an effort to compete.
Alphabet (GOOG +0.03%) (GOOGL +0.20%) is one such tech giant that started playing catch-up following Microsoft's AI push. The search engine giant introduced the Bard generative AI chatbot in response to ChatGPT this February. The move backfired, and Alphabet stock fell after Bard made a mistake during the launch event.
More recently, Alphabet won back some of Wall Street's confidence with its latest AI-related announcements at the Google I/O conference earlier this month. The company is now going toe to toe with Microsoft in the AI arms race, but does that make it a better bet? Let's find out.
NASDAQ: GOOG
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Alphabet is going all out to defend its fort with AI's help
Alphabet is deploying AI into multiple offerings. In Gmail, for instance, the "Help Me Write" generative AI feature will compose entire emails for users based on their prompts. The company's photos and maps applications will also get the AI treatment, but Alphabet isn't stopping there. The company is bringing AI to the Google Workspace suite of collaboration and productivity applications.
Alphabet points out that the AI-enabled Workspace will allow users to create images from text within the Google Slides app, organize data in Google Sheets, generate relevant background in video calls while using Google Meet, and even write content in Google Docs. But most importantly, the company is bringing generative AI to its core product -- Google Search.
Though still in its early stages, the generative AI-enabled Google Search will deliver results in a conversational manner. What's more, users will be able to ask entire questions -- such as which product to buy and where to go for a holiday -- and the AI-powered Search will provide them with relevant, contextual answers.
Google Search is Alphabet's biggest source of revenue. It generated $40 billion in revenue in the first quarter of 2023, which was 58% of the company's top line. However, the segment's revenue increased just 1% year over year, which explains why Alphabet's total quarterly revenue increased just 2.6% to almost $70 billion as compared to the year-ago period.
Microsoft's integration of AI into its Bing search engine may also be a reason for this tepid performance. Web analytics company SimilarWeb points out that the deployment of OpenAI by Microsoft into its search engine increased Bing's traffic and page views by 16%. Google Search, meanwhile, saw a 1% drop. What's more, Microsoft Bing app downloads have reportedly jumped eight times after the integration of AI. Google Search app downloads, meanwhile, are down 2%.
However, Google continues to remain the leader in the search engine market with a staggering share of 85%. The addition of AI to the search platform should help Alphabet defend its solid share of this market and allow the company to take advantage of the next-generation search engine market that's expected to clock 25% annual growth over the next five years, according to Mordor Intelligence.
On the other hand, the addition of AI to Google Workspace could be another long-term growth driver for Alphabet. Google's apps reportedly controlled half of the office productivity software market in 2022, followed by Microsoft Office 365 in second place with a 45% share. The demand for cloud-based office productivity software is expected to jump from $21 billion last year to $128 billion in 2030, clocking an annual growth rate of 25%.
So, Alphabet's move to add AI to its office productivity suite could be another smart move as its dominant share of this market could add billions of dollars to its revenue in the long run.
Can Microsoft sustain its first-mover advantage?
Microsoft's entry into the chatbot space late last year with OpenAI's ChatGPT gave the company early access to the fast-growing generative AI space that's expected to clock 35% annual growth through 2030. The chatbot market alone is expected to grow at an annual pace of 30% over the next five years, according to Mordor Intelligence.
NASDAQ: MSFT
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Microsoft, through its stake in OpenAI, is in a solid position to make the most of this opportunity right now. That's because ChatGPT's user base stood at a whopping 1.16 billion in March this year, growing an impressive 55% over the prior year. It is worth noting that ChatGPT's subscription base is increasing at a solid clip even after the introduction of a subscription plan that costs $20 a month.
What's more, Microsoft has deployed OpenAI's algorithms in more applications such as the Azure cloud and the Teams collaboration software suite. All this indicates that Alphabet is doing the same things with AI that Microsoft has already done. However, Alphabet's advantage is that it enjoys a greater share of key markets such as search and office productivity, and the addition of AI to these services could help it defend its solid position.
With all that being said, it is too early to see which of these two technology giants can make the most of AI. But Wall Street seems to be putting its money on Microsoft right now. Credit Suisse, for instance, forecasts that ChatGPT alone could increase Microsoft's revenue by $40 billion and earnings by $2 per share over the next five years or so.
That won't be surprising given the chatbot already has more than a billion users, as discussed earlier. Even if a quarter of that massive user base opts for the paid version of ChatGPT, Microsoft and OpenAI could easily pull in the huge amount of revenue that Credit Suisse is estimating. Alphabet, on the other hand, has more work to do on its Bard chatbot.
But the good part is that the search engine giant is bringing its offering up to speed by enhancing its abilities, such as Bard's math and reasoning skills as well as its coding capabilities. What's more, Alphabet has now made Bard available in 180 countries globally. So, it can eventually give Microsoft a run for its money in this market.
Too early to call an AI winner
In the end, it can be concluded that it is too early to say whether Microsoft or Alphabet will win the AI race. Both companies have their strengths and limitations. Microsoft has made an early move into this space but given that the technology is in its early phases of adoption, Alphabet still has enough time to pull up its socks. Additionally, the AI market is expected to generate close to $16 trillion in revenue by the end of the decade, which means that there should be enough space for both Microsoft and Alphabet to thrive here.
So, investors can consider buying either of these tech giants as both could turn out to be top AI stocks in the long run given their specific strengths.
