OpenAI launched its current version of ChatGPT in late 2022 and with it increased investor interest in all things artificial intelligence (AI). Since, Microsoft (NASDAQ: MSFT) And Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) have emerged as two AI leaders, defining the category and its applications. Microsoft is a close partner of OpenAI, and Alphabet quickly unveiled its answer to ChatGPT – Bard – shortly after ChatGPT was released.
Nearly a year after Microsoft unveiled its AI-infused Bing Chat and launched Alphabet Bard, the two companies reported profits for the October to December quarter. Investors sold both stocks on the news they reported, suggesting the boom in AI stocks may be overdone. And yet both companies delivered solid numbers.
Let’s take a look at each company’s recently released report and see which AI stock is the best to buy today.
Microsoft reports broad-based growth
Microsoft recently took over the title of the world’s most valuable company Apple, and the company’s profits show why. In fairness, the enterprise software company completed its acquisition of Activision Blizzard in October, resulting in a modest increase in results from the year-ago quarter.
Microsoft’s second-quarter 2024 revenue rose 18% year over year to $62 billion, surpassing analyst estimates of $61.14 billion. Operating income increased 33% year over year, or 25% on a non-GAAP (generally accepted accounting principles) basis. On the bottom line, earnings per share (EPS) also rose 33% year over year, or 26% on a non-GAAP basis, to $2.93. That was also earlier than expected.
Microsoft’s cloud was another bright spot for the company, as its intelligent cloud segment grew 20% year over year and Azure revenue rose 30%. Search and news advertising revenue growth was modest at 8% year-over-year, suggesting that Bing Chat has not developed as well as the company had hoped.
Microsoft ended the after-hours session with a loss of 0.3%.
Alphabet is falling short on an important metric
Alphabet delivered a solid fourth-quarter 2023 report overall as the company continues to recover from the slowdown in the digital advertising market. Revenue rose 13% year-over-year to $86.3 billion, ahead of the $85.3 billion consensus, but advertising revenue of $65.5 billion was slightly below expectations, pushing the share price up 6 in after-hours trading % decreased.
The weaker-than-expected ad revenue growth seemed to indicate that Alphabet was losing market share to competitors or that AI has not yet made a significant impact on ad spend.
Ultimately, earnings per share rose from $1.05 to $1.64 due to a $2 billion improvement in equities. Operating income rose 30% to $23.7 billion.
Advertising revenue rose 11% to $65.5 billion, partly due to continued weakness in the Google Network, where revenues fell again. Google Cloud, the other closely watched business segment, posted 26% growth to $9.2 billion, and reported operating income of $864 million, compared to a loss of $186 million in the year-ago quarter.
The mutual comparison
Both Microsoft and Alphabet saw strong share price growth last year, with each company reporting similar growth on both the top and bottom lines last quarter. The difference between the two companies comes down to their AI strategies, and Microsoft appears to have the edge here.
The company rolled out its AI-powered Copilot across a wide range of products, including the Office 365 suite, Github, Azure and Bing. Microsoft management also said that AI drove six percentage points of revenue growth in Azure, increasing it from 24% to 30%, which is significant and likely to improve.
Finally, compared to Alphabet, Microsoft appears to be better prepared for the AI revolution, as it made acquisitions like Github that fit well with its AI Copilot tools, and its investment in OpenAI was a game-changer.
Alphabet, on the other hand, acquired AI research lab DeepMind several years ago, but only integrated with Google Brain last year. Google’s parent company had the technology to roll out its own chatbot, but let OpenAI and ChatGPT drive the story with AI chat.
Why Microsoft is the better AI stock to buy
Alphabet is no slouch in the AI space, but its Google parent company lacks the strategy and applications to fully leverage the power of generative AI the way Microsoft has.
Microsoft, on the other hand, has planned for this moment and taken smart risks, including an alliance with OpenAI. It also has a much more diversified product range compared to Alphabet, which makes most of its money from advertising, a company that so far does not appear to be significantly benefiting from AI.
Microsoft stock is more expensive than Alphabet, but it’s the better AI stock to buy here. The long-term prospects with the new technology still look significantly more promising.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Apple, and Microsoft. The Motley Fool has a disclosure policy.
Microsoft vs. Google: Which is the Better AI Stock to Buy Now was originally published by The Motley Fool