Microsoft (MSFT +3.02%) and Alphabet (GOOGL +6.73%) (GOOG +6.88%) are locked in a battle to convince you, the investor, which is the better artificial intelligence (AI) company and, by extension, the better stock to own. The two were largely in different businesses for much of their history, but their moves into the cloud have made them competitors.
Of the two, Microsoft is the second-largest cloud company. However, Alphabet's Google Cloud is in third place, and in the first quarter of 2026, it had the faster-growing cloud segment.
Now, the question for investors may be which AI stock to buy right now. Let's take a closer look.
Image source: Getty Images.
The case for Microsoft
Microsoft emerged as a major player in the cloud after Satya Nadella, who had previously led Microsoft's cloud and enterprise group, became CEO in 2014.
Since its flagship Windows and Office businesses had stagnated, Nadella redefined Microsoft as more of a cloud company. The efforts proved successful, and the company's Azure platform became the second-largest cloud platform behind the cloud pioneer, Amazon Web Services (AWS).
In the first quarter of 2026, Azure's revenue increased by 40% yearly. This was far above the 18% overall revenue growth for the company during the same period. Operating expenses grew at a slightly slower rate, meaning its $32 billion in profit rose by 23% over the same period.
However, its AI engine, Microsoft Copilot, is in an uncertain place in the market. Despite Microsoft's longtime alliance with ChatGPT creator OpenAI, Copilot appears to have lower adoption rates than either ChatGPT or Google Gemini.
NASDAQ: MSFT
Key Data Points
Amid its struggles, its stock has appreciated little over the last year. Still, with its revenue and profit growth, the P/E ratio has fallen to 25, well below the S&P 500 (^GSPC +0.70%) average of 31. Ultimately, with that low valuation and the strong growth of Azure, Microsoft could be an attractive buy at such levels.
Why investors might consider Alphabet
The prospects for Google-parent Alphabet have dramatically changed over the last year. Last year, many investors worried that generative AI had passed Google Search by.
However, a later release of Google's AI engine, Gemini, changed the game for the company, seemingly shutting down the skepticism. Additionally, it has leveraged data collected from Google Search and developed a Tensor Processing Unit (TPU) to reduce its dependence on AI chip giant Nvidia.
Amid this approach, the company delivered incredible news to shareholders in the first quarter of 2026. In one quarter, its backlog grew from $240 billion to $460 billion! Moreover, during that quarter, Google Cloud revenue surged by 63%, far ahead of its overall revenue growth of 22%. Amid that improvement, it earned $63 billion in net income, an 81% yearly increase.
Indeed, Alphabet is not foolproof. The $175 billion to $185 billion it pledged to spend on capital expenditures (capex) this year is a considerable sum, even for the Google parent. Also, the concern that AI leads to fewer direct visits to websites could potentially still hurt the ad business, which made up 70% of the company's revenue in Q1.
NASDAQ: GOOGL
Key Data Points
Nonetheless, its P/E ratio is just 30, despite its growth, just below the S&P 500 average. Considering Google Cloud's massive growth, it may not be too late to buy this stock.
Microsoft or Alphabet?
In a sense, there likely is no bad pick here. Both stocks should outpace the market amid rapid cloud growth and P/E ratios near or below market averages. Still, if one has to choose, Alphabet appears to have the edge. Although Microsoft has a lower P/E ratio, it faces a larger challenge in making Copilot competitive with other AI models.
Moreover, Google Cloud grew much faster than Azure, as the company could leverage its data and in-house hardware to foster a competitive advantage. Thus, even if AI forces Alphabet to transition away from its reliance on digital ads faster than anticipated, it appears to be in a comparatively stronger position to drive growth through AI.
