The artificial intelligence (AI) race is still in its early stages, though it might not feel like it, and there's still plenty of time for tech companies to overtake each other. For investors looking for opportunities in the space, it may be appealing to pick a small AI start-up that might grow by leaps and bounds, but larger companies have deeper pockets, making their AI investments (and shifting strategies) much more likely to succeed.
Which ones will prove to be the best AI stocks in the coming years? Let's take a look at what Microsoft (MSFT +0.66%) and Alphabet (GOOG +2.92%) (GOOGL +2.53%) are doing to shore up their AI dominance, and consider which one is more likely to be the better artificial intelligence stock in the coming years.
Why Microsoft is a leading AI play
Let's start with the most obviously smart AI move Microsoft has made: It invested an estimated $13 billion in ChatGPT creator OpenAI. That gave Microsoft early access to some of the most advanced AI models available, and it wisely started embedding them into nearly all of its software products.
NASDAQ: MSFT
Key Data Points
ChatGPT is the underlying AI tech in Microsoft's Copilot tools, which are now in Word, Excel, PowerPoint, Outlook, and Teams. The software bundle they comprise, Microsoft 365, is used by 1.3 million companies in the U.S. alone. For tens of millions of workers, Microsoft's software is now synonymous with the advanced AI tools they use every day.
This integration is already paying off for Microsoft, and the best example may come from the company's GitHub developer platform, in which 40% of its recent revenue growth came from Copilot, according to management. Microsoft's leadership said on the fourth-quarter earnings call that AI is driving GitHub's growth and has boosted its annual revenue run rate to $2 billion.
Of course, Microsoft isn't just a software company these days. Its Azure unit is the second-largest cloud computing infrastructure provider in the world, with 25% of the market. Microsoft has integrated new AI tools into Azure, and management said on the Q2 earnings call that Azure now has 60,000 AI customers -- a 60% increase from the prior-year period.
Image source: GETTY IMAGES.
Microsoft will probably make another noteworthy AI investment soon. OpenAI is about to have another funding round, and Microsoft is reportedly going to participate. Keeping OpenAI close is a wise bet right now. Microsoft is already benefiting from the companies' close working relationship, and there's no reason to believe it won't continue to reap the rewards in the near future.
How Alphabet is tapping into AI
Alphabet has long been a major player in artificial intelligence, mostly with behind-the-scenes tech. For example, AI is a fundamental part of the systems that provide its Google Search results and YouTube recommendations, which feed relevant content to users and help power its ad business.
But on the generative AI front, Alphabet had to play catch-up over the past two years, releasing its own AI model called Gemini to compete with ChatGPT, and integrating more AI-powered responses into its search results.
NASDAQ: GOOG
Key Data Points
So far, Gemini appears to be a success. On Alphabet's second-quarter earnings call, management said that all six of its Workspace products, which have more than 2 billion users, are now using Gemini. Gemini is sold as an add-on feature to the company's suite of products.
But one of the biggest AI opportunities for Alphabet may be in cloud computing. Google Cloud is the third-largest cloud infrastructure provider (behind Amazon Web Services and Azure), and its artificial intelligence integrations are already paying off. Google Cloud sales increased 29% in the second quarter to $10.3 billion, and part of that growth came from "increasing contribution from AI," according to Alphabet CFO Ruth Porat.
And, just like Microsoft, Alphabet has made investments in AI start-ups. Most notable was its $2 billion investment in OpenAI rival Anthropic, which makes the popular AI chatbot Claude. The investment should help Alphabet keep abreast of the newest AI capabilities coming from start-ups.
Microsoft is the better AI stock
While both of these companies could be good long-term AI plays, I think Microsoft has an edge over Alphabet for two reasons.
First, Microsoft has a 49% ownership stake in OpenAI, which is arguably the leading generative AI software company right now. The decision to hitch its wagon to OpenAI's tech already looks like a smart one, and Microsoft could continue to benefit as OpenAI releases more advanced models and new services down the road.
Second, while Alphabet will benefit from selling AI services for Google Cloud, Microsoft is a larger cloud company and will probably see more benefit from AI-related demand. Goldman Sachs estimates cloud revenue from all tech companies could climb to $2 trillion by 2030, and much of the growth will be fueled by AI. With Microsoft already holding a quarter of the cloud market, it's well positioned to benefit.
Microsoft trades at a forward price-to-earnings ratio of 32, which is more expensive than Alphabet's forward P/E of 17.6. While I'd usually prefer to pick the stock that's technically less expensive, I think Microsoft has enough of a jump on its rivals in the AI space that it could outperform them in the software and cloud computing arenas for years to come.
