Here’s Why Alphabet Is a Much Better Buy Than Microsoft Right Now

Although Microsoft (MSFT 0.12%) is the largest company in the world, Alphabet (GOOG 0.72%) (GOOGL 0.75%) looks like a much more attractive buy right now. This may seem counterintuitive, as Microsoft has executed at a high level for some time while Alphabet struggled throughout 2023.

However, Alphabet looks to be turning itself around. And with its shares trading at a far lower premium than Microsoft’s, it appears to be a much stronger buy. Let’s find out why.

Both are integrating generative AI into their platforms

Due to their sheer size, both companies have many irons in the fire. Microsoft Office and the various programs that add on to the platform are critical business tools used by a large chunk of the corporate workforce daily. Similarly, Alphabet’s Google search engine is the go-to spot for finding information and generates revenue from advertisements on that platform.

Both of their primary products have recently been upgraded with generative AI technology. Microsoft introduced Copilot, which gives its users a digital assistant that can help with formatting, finding formulas, and composing emails. Alphabet recently added a summary feature powered by its in-house large language model (LLM), which succinctly summarizes search results from multiple websites at the top of the webpage.

However, the big difference is that Alphabet completely controls its LLM, while Microsoft has partnered with OpenAI. While OpenAI’s ChatGPT beat Alphabet’s Gemini (formerly known as Bard) to the punch in its initial launch, the gap has closed between them. Alphabet can fix the LLM in-house if something goes wrong (which has happened multiple times already), while Microsoft must go to a different company to get the fixes it needs.

While this hasn’t been an issue yet, having full control over the artificial intelligence (AI) model is a big deal. This is another reason why Alphabet looks like a better buy than Microsoft.

Microsoft is priced for perfection

From a financial standpoint, both companies had strong initial quarters in calendar 2024. Microsoft’s revenue rose 17% year over year while Alphabet’s increased 15%. Comparing net income increases isn’t fair, as Alphabet’s comparison quarter in Q1 2023 is very weak.

Still, both companies are growing at a similar rate, making it seem odd that there is a substantial valuation mismatch. I’ll use the forward price-to-earnings (P/E) ratio to value each stock. This considers what analysts think will happen over the next four quarters, giving investors a forward-looking perspective.

MSFT PE Ratio (Forward) data by YCharts

With Microsoft is valued at 35 times forward earnings versus Alphabet’s 23, Microsoft holds a 50% premium over Alphabet. That means you can control as much of Alphabet with two shares as you could with three shares of Microsoft.  As both companies age, this fact becomes more important, as Alphabet’s share repurchases and dividends will have a far greater effect than Microsoft’s.

From a stock price standpoint, anything less than perfection from Microsoft will result in a stock drop. Furthermore, success is already expected, and just because Microsoft does well doesn’t mean the stock will respond. Alphabet doesn’t have those same expectations, and its cheaper valuation will allow its business gains to translate directly to the stock price.

With both companies executing at similar levels and delivering comparable growth, there are few reasons investors should buy Microsoft over Alphabet. Investing in the stock market can be hard enough; don’t make it overly complicated by buying shares priced for perfection like Microsoft’s.