Alphabet (GOOG +0.41%) (GOOGL +0.66%) and Microsoft (MSFT 1.33%) are two of the biggest names in artificial intelligence (AI), but investors may have a hard time deciding which is the better buy. I think each stock has its benefits and drawbacks, but one is clearly a better buy than the other right now.
So, which one is it? Let's take a look.
Image source: Getty Images.
Microsoft's core business is steadier
While both Microsoft and Alphabet are expanding their businesses to include AI integration, each has a core business that keeps the lights on. For Alphabet, it's the company's Google platform, and it generates most of its revenue from advertising. The advertising market can go up and down based on economic outlook, and Alphabet's ad business isn't always a great investment.
NASDAQ: MSFT
Key Data Points
Microsoft makes business and productivity software for consumers and companies, and while its growth rate may slow during economic downturns, it's unlikely to go in reverse, unlike Alphabet's. This makes Microsoft's business a bit steadier than Alphabet's, so I'll give Microsoft the nod in this category.
Winner: Microsoft
Cloud computing is an emerging part of every company
While both companies are investing and implementing AI, the biggest way this shows up in their results is in their cloud computing segment. Google Cloud and Azure are two of the most important business units for each company, and each is rapidly growing.
NASDAQ: GOOGL
Key Data Points
During the fourth quarter, Google Cloud's revenue rose an impressive 48% year over year to $17.7 billion. Unfortunately, Microsoft only gives investors the revenue growth figure for Azure, which was a strong 39%. If we had the raw revenue figure, we could compare the two to see which cloud computing unit added more business, but because we can't, I have to give the win to Alphabet.
Winner: Alphabet
Business is strong for both
During Microsoft's last quarter, its revenue rose 17% year over year. Alphabet grew slightly quicker, posting a 18% growth rate. There really isn't a ton of difference between these two results, and each has showcased that they are growing rapidly in today's market environment.
Winner: Tie.
Microsoft is a far cheaper stock
Moving into the last category, Microsoft and Alphabet are all tied up. However, this last category can really swing the opinion one way or another, as even the best companies bought at the wrong price can deliver sub-par returns. To eliminate the effects of investment gains (which add to earnings even if neither company sold off any of its investments), I'm going to value each stock using the operating price-to-earnings ratio. This provides a better picture of how the core businesses are doing, and ignores any one-time effects in the net income calculation.
Over the past five years, Microsoft has always traded at a premium to Alphabet, but that was flipped in the five years before that due to Alphabet's superior growth rate. Now, we can see the trend reverting.
MSFT Operating PE Ratio data by YCharts
However, there are a few key takeaways I want to highlight. First, Microsoft is now priced at the cheapest levels since the late-2022, early-2023 sell-off. Before that, it had been 2018 since Microsoft's stock was this cheap. On the flip side, Alphabet's stock hasn't been this expensive for a while, which is a bit of a red flag to me.
While both businesses are doing well, Alphabet is clearly valued at a premium while Microsoft is trading at a discount. This makes it clear who the winner is in this category.
Winner: Microsoft
Overall, Microsoft wins at two points to one, with a single tie. However, I think the valuation argument is the single most important one when comparing these two, and I think Microsoft a far better buy than Alphabet right now as a result.
