Will Alphabet Be Worth More Than Microsoft by 2030?

Ten years ago, Alphabet (GOOG 9.96%) (GOOGL 10.22%) -- then known as Google -- was worth $377 billion. Microsoft (MSFT 1.82%), which was widely seen as an aging tech giant that missed the mobile revolution, was worth only $306 billion. But as of this writing, Microsoft is worth $3 trillion, and Alphabet only $1.9 trillion.

Microsoft became a growth stock again after Satya Nadella, who took over in 2014 as its third CEO, prioritized the expansion of its cloud, mobile, and artificial intelligence (AI) ecosystems. Alphabet continued growing under Sundar Pichai, who took on the CEO role in 2015. However, its core advertising business faced tougher competition from social media platforms as it struggled to keep pace with Microsoft in the cloud and AI markets. But could Alphabet catch up to Microsoft again by 2030?

Image source: Getty Images.

Reviewing Alphabet's biggest challenges

In the first nine months of 2023, Alphabet generated 78% of its revenue from Google's advertising business (including its search engine, ad network, and YouTube), 11% from Google's "other" non-advertising businesses (including its subscriptions, Play Store sales, and hardware), and another 11% from its Google Cloud Platform (GCP). Here's how those three core businesses fared over the past five years.

Data source: Alphabet. YOY = year over year.

In 2020, Google's advertising business suffered a slowdown as the pandemic forced companies to rein in their marketing expenses. However, Google Cloud's growth offset that slowdown as more companies ramped up their spending on cloud-based services. In 2021, Google's advertising business recovered as its cloud growth accelerated.

But both of those growth engines cooled off over the past two years. Inflation, rising interest rates, geopolitical conflicts, and other macro headwinds forced many companies to reduce their spending on Google's advertising and cloud services.

Both businesses also faced heightened competition. ByteDance's TikTok and Meta Platforms' Reels challenged YouTube in the ad-supported streaming video market, while Amazon Web Services (AWS) and Microsoft Azure continued controlling much larger shares of the cloud infrastructure market than GCP.

In their latest quarters, Google's cloud business actually grew at a slower rate (22%) than Microsoft's Azure (29%), which broadly benefited from integrating OpenAI's generative AI tools into its cloud-based services. That widening gap seemed to suggest Google was falling behind Microsoft in both the cloud and AI markets.

Alphabet faces an uphill battle against Microsoft

Analysts expect Alphabet's revenue to rise 8% in 2023 and to grow at a compound annual growth rate (CAGR) of 11% from 2023 to 2025. Most of that growth should be driven by the stabilization of its advertising business, but its cloud business could struggle to gain meaningful ground against AWS and Azure. According to Canalys, AWS controlled 31% of the market in the third quarter of 2023, Azure held a 25% share, and Google ranked a distant third with a 10% share.

As for the AI market, Alphabet has been developing its own AI chips, expanding its Bard AI chatbot, and integrating Gemini's large language models into its own apps. However, it's unclear whether those efforts can actually help Google catch up to Microsoft and its top partner, OpenAI. There's also the alarming possibility that OpenAI's ChatGPT and other generative AI chatbots could gradually pull the next generation of internet users away from Google's core search engine.

Meanwhile, analysts expect Microsoft's revenue to grow at a CAGR of 14% from fiscal 2023 (which ended last June) to fiscal 2026. We should take those rosy estimates with a grain of salt, but Wall Street believes Microsoft's streamlined leadership of the cloud and AI markets -- and its lower exposure to the macro-sensitive ad sector -- will enable it to grow faster than Alphabet over the next few years.

Alphabet needs to break out of its rut to impress the bulls

Based on those growth trajectories, Alphabet seems unlikely to catch up to Microsoft by 2030. However, investors should note that Microsoft trades at 37 times forward earnings, while Alphabet is a bit cheaper at 23 times forward earnings.

In other words, the market's expectations are high for Microsoft but fairly low for Alphabet. If Microsoft makes a few mistakes and Alphabet demonstrates that its cloud and AI investments are paying off, the gap between the two companies' market capitalizations might shrink over the next six years. However, I personally believe that Microsoft -- which has been more focused and taken bigger risks than Alphabet over the past decade -- will still be the more valuable company.