Though behemoth Microsoft (NASDAQ: MSFT) reigns as the world’s largest company, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) emerges as a more enticing investment opportunity. This assertion may counter conventional wisdom, given Microsoft’s consistent high performance contrasted with Alphabet’s challenges throughout 2023.
Yet, Alphabet seems to be orchestrating a turnaround. With shares trading at a significantly lower premium than Microsoft’s, Alphabet resonates as a more compelling buy. Let’s delve into the reasons behind this assertion.
Embracing Generative AI in Platform Integration
Owing to their substantial scale, both companies boast diverse business interests. Microsoft’s suite of Office products and supplementary applications serves as vital tools for a significant portion of the global workforce. Similarly, Alphabet’s Google search engine stands as the go-to destination for information retrieval and garners revenue through advertising on its platform.
Recently, both tech giants have upgraded their flagship products with generative AI technology. Microsoft introduced Copilot, empowering users with a digital assistant proficient in formatting, formula discovery, and email drafting. On the other hand, Alphabet launched a summary feature fueled by its proprietary large language model (LLM). This element succinctly synthesizes search outcomes from various websites at the apex of the webpage.
Alphabet’s distinctive advantage lies in its complete control over the LLM compared to Microsoft’s partnership with OpenAI. While OpenAI’s ChatGPT initially outpaced Alphabet’s Gemini (now Bard) in the debut phase, subsequent advancements have narrowed the gap. Alphabet possesses the capability to rectify LLM issues internally, unlike Microsoft, which necessitates external intervention for resolutions.
This absolute control over the AI model stands as a critical factor favoring Alphabet in comparison to Microsoft, contributing to its elevated investment allure.
Microsoft: Priced for Perfection
Financially, both companies delivered robust performances in the initial quarters of calendar year 2024. Microsoft observed a 17% year-over-year revenue upsurge, while Alphabet’s revenue ascended by 15%. Directly contrasting net income growth proves inequitable, given Alphabet’s notably weak Q1 2023 quarter for comparison.
Despite similar growth trajectories, a substantial valuation misalignment exists between the two firms. A forward price-to-earnings (P/E) ratio comparison unveils Microsoft commanding a 35x valuation against Alphabet’s 23x, implying a 50% premium held by Microsoft. Consequently, investing in Alphabet offers more significant control over shares in tandem with enhanced potential impacts from the company’s share buybacks and dividends as both entities mature.
Moreover, Microsoft’s stock is delicately poised, requiring near perfection to maintain value. Conversely, Alphabet bears lower performance expectations, and its more economical valuation enables direct translation of business gains into stock performance.
Amid comparable execution and growth trajectories, compelling reasons favoring Microsoft over Alphabet are meager. Navigating the stock market complexities demands avoiding shares priced for perfection akin to Microsoft’s current standing.
Should you invest $1,000 in Alphabet right now?
Prior to investing in Alphabet, reflecting on:
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