Key Points
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) are two of the biggest artificial intelligence hyperscalers. Combined, they are nearly an $8 trillion entity and are competing in many of the same industries. These two are often compared to each other, but which one makes for the best AI stock to buy right now?
Let’s take a look at each and see where the stocks may be headed, and figure out which is the best buy.
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Microsoft’s business is more consistent
When you break down each business, it’s clear that both are tech giants with multiple revenue streams. However, the primary business units of each have different levels of consistency.
Microsoft is primarily a business productivity company. This is highlighted by Microsoft Office — software that’s on nearly every computer in the world. While it may have other business units, investors mostly focus on how this business is going to judge the overall health of the company.
Likewise, Alphabet has many business units, but it all circles back to the Google Search engine. This platform generates revenue from advertising, which can be a bit cyclical. When economic sentiment is positive, advertising revenue is typically strong. However, ad budgets are among the first items to be cut whenever economic uncertainty starts to appear, which makes the industry a bit more volatile than Microsoft’s business productivity software.
While Microsoft’s revenue stream won’t grow as rapidly during economic uncertainty, clients aren’t going to cut Office products out of the budget to make ends meet, as they would with advertising.
Winner: Microsoft
Alphabet is growing more quickly
From a pure growth standpoint, Alphabet is outperforming Microsoft, although this is a recent development.
MSFT Revenue (Quarterly YoY Growth) data by YCharts
Still, both companies are growing rapidly for their size, making growth acceptable to investors from both parties.
One area where Alphabet has the edge is in cloud computing. Both companies have sizable cloud computing businesses, and investors are always comparing the two. In each of the most recent quarters, Microsoft Azure grew at a 40% clip, while Google Cloud rose 63% year over year. That’s a sizable outperformance, and the gap is mostly explained by Alphabet’s decision to sell its proprietary TPUs to external clients, rather than only using them for internal computing tasks.
That’s a business side that Microsoft doesn’t have, giving the edge to Alphabet here.
Winner: Alphabet
Alphabet’s stock is reaching new valuation highs
We’re all tied up entering the last category, and each company’s win in the previous two categories was by a fairly slim margin. However, this last category will clearly crown a winner: valuation. Valuation is vital when considering which companies to invest in, because the best companies bought at the wrong price can turn into bad investments. I think that’s exactly what’s going on with Alphabet right now.
Alphabet has had a phenomenal run over the past year and has rallied to new heights. However, it is now valued near an all-time high from one valuation metric. On the flip side, Microsoft has a relatively low valuation, making it seem like a bargain.
There are a million ways to value a company, but my favorite for these two is via cash from operations. This only considers how much cash the businesses are generating, ignoring capital expenditures and other one-time effects like investment gains. From this perspective, it’s clear which looks like the better historical value.
MSFT Price to CFO Per Share (TTM) data by YCharts
Alphabet is trading at a decade-high level, while Microsoft is near decade lows. While I think Alphabet has long been undervalued and deserved to reach its current point, Microsoft has done nothing to warrant losing its premium. As a result, Microsoft is the better value, and thus the better stock to buy.
Winner: Microsoft
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Keithen Drury has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.
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