The artificial intelligence (AI) wars are here. Microsoft and Alphabet (GOOG 0.50%) (GOOGL 0.51%) are among the big names fighting for supremacy in this new tech battleground. Both companies have chatbots, both have AI-powered office products, and there will likely be even more ways for these two companies to compete within the AI arena in the future.
It has now been over a year since OpenAI's ChatGPT first entered the mainstream. Alphabet, through Google, launched Bard months later, but it has not been nearly as popular.
However, that could change. Bard is getting an upgrade now that Google has released an updated AI model, one that should intensify the competition between ChatGPT-4 and Bard.
Gemini is here
Google recently unveiled Gemini, its latest AI model. There are three variations of it: Nano, Pro, and Ultra. The Nano model focuses on efficiency and is available on the company's Pixel 8 Pro phones, whereas the Ultra version is the largest and most capable model.
Bard will now have access to Gemini Pro, which is the mid-range AI model. Google says this is the biggest upgrade it has made to its chatbot. And next year, Google will launch Bard Advanced, which utilizes Gemini Ultra. According to Google's tests, Gemini Ultra outperformed ChatGPT-4 on 30 out of 32 benchmarks.
In addition to Bard, Google says Gemini will also be available in other services, including Search, Chrome, and Duet AI, which powers its office productivity software.
Why this could give Alphabet's stock a boost
The huge popularity of ChatGPT-4 has undoubtedly played a key role in Microsoft's rising valuation this year. It has invested billions in OpenAI, the company that created ChatGPT.
And when OpenAI fired CEO Sam Altman last month, Microsoft jumped at the chance to hire the former OpenAI CEO. Ultimately, he would return to OpenAI as CEO, but it highlighted just how closely the ties are between the two companies.
That relationship likely plays a big role in why investors are willing to pay such a large premium for Microsoft's stock. At 36 times earnings, it's trading at a much higher premium than Alphabet, which sports a multiple of 26. This difference in their respective price-to-earnings valuations is at a 10-year high.
Investors have typically paid more of a premium for Alphabet. But between a weak ad market in 2022 and Microsoft appearing to have the upper hand in AI (at least initially), growth investors appear to have gravitated more toward the Redmond giant.
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If Bard proves to be a more formidable chatbot thanks to Gemini, and it can indeed perform better than ChatGPT-4, that could swing the pendulum back into Alphabet's favor and lead to more investors buying up the relatively cheap AI stock.
Is Alphabet stock a buy?
Shares of both Alphabet and Microsoft are up more than 50% this year. But with Alphabet trading at a noticeably lower valuation, it may be the better AI stock to buy right now. ChatGPT-4 is the big chatbot today, but this is still the early innings of what may prove to be a long race in AI.
While I wouldn't buy Alphabet's stock based purely on the rollout of Gemini, it does look like the better investment option today. Counting out this top tech stock in the AI wars this early could prove to be a big mistake for investors.
