Better Artificial Intelligence Stock: Microsoft vs. Alphabet

The race is on for dominance in the artificial intelligence arena. Two tech titans battling for AI supremacy are Microsoft (NASDAQ: MSFT) and Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG).

Both are heavily involved in AI. Microsoft invested billions of dollars into OpenAI, the company that helped kick off the current AI frenzy with its ChatGPT product. Alphabet created the tensor processing unit, a piece of hardware that accelerates data processing by its AI computers.

Between these two tech powerhouses, which is the better AI investment? The answer is a bit complicated, so let's compare the pair to arrive at an answer.

Microsoft's use of AI

Microsoft is a leader in delivering AI experiences to consumers and businesses. The conglomerate injected AI across its broad range of offerings.

For example, its Copilot AI is now embedded in the company's ubiquitous Office software to help customers perform tasks such as composing emails. An AI hiring assistant was added to its professional networking website, LinkedIn, as a tool for recruiters.

Its Azure cloud computing platform provides the infrastructure to enable other companies to use Microsoft's AI in their businesses. Customers are jumping on the opportunity to build their own AI assistant, with adoption doubling over the past six months.

The AI investments are paying off. CEO Satya Nadella said, "Our AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which will make it the fastest business in our history to reach this milestone."

Its AI products helped Microsoft achieve strong results in its fiscal first quarter, which ended Sept. 30. Q1 revenue reached $65.6 billion, which represented a 16% increase from the previous year.

Not only did revenue grow, its fiscal Q1 net income increased 11% year over year to $24.7 billion. This, in turn, led to diluted earnings per share (EPS) rising to $3.30, a 10% increase over the prior year.

Alphabet's AI strengths

Alphabet may be known for its Google search engine, given its commanding 90% market share in online search, but its work in AI is enabling the company to evolve its offerings.

For example, owners of the company's Pixel smartphone can use their fingers to circle an item on the touchscreen, and AI will assist with a search. And now, more than 25% of the software code created at Google is written by AI.

Like Microsoft, Alphabet has its own cloud computing service, Google Cloud, that allows businesses to access its artificial intelligence platform and build their own AI apps. Social media company Snap is one of its customers.

AI also plays a role in Alphabet's Waymo self-driving car business. Waymo now provides more than 150,000 paid rides every week.

Its AI accomplishments helped Alphabet hit $88.3 billion in Q3 revenue, representing 15% year-over-year growth. Net income also rose in the quarter, reaching $26.3 billion, a 33% jump up from the prior year. This led to diluted EPS of $2.12 per share, an increase over 2023's $1.55.

Deciding between Microsoft and Alphabet stocks

Microsoft and Alphabet have demonstrated impressive outcomes with their AI initiatives. This makes selecting the superior AI investment a difficult choice. However, one other key factor entered the mix in the second half of this year.

In August, a U.S. judge found Alphabet to be in violation of antitrust laws. Then, on Nov. 20, the U.S. Justice Department filed a proposal asking the judge to break up the company.

That's not the only cloud hanging over the conglomerate. Alphabet faces a second antitrust lawsuit. This one targets Google's advertising business, which accounted for $65.9 billion of its $88.3 billion in Q3 sales. Closing arguments were completed on Nov. 25, and the judge's ruling on the case is pending.

The uncertainty around Google's antitrust cases means Microsoft is the safer choice to invest in over Alphabet at this time. That said, another consideration between these stocks is their price-to-earnings (P/E) ratio. This metric helps to assess stock valuations by telling you how much investors are willing to pay for a dollar's worth of earnings.

Data by YCharts.

As the chart shows, Alphabet's P/E multiple is lower than Microsoft's at the time of this writing, indicating its stock is a better value. This makes sense since, as of Nov. 25, its share price was down significantly from the 52-week high of $191.75 it reached in July.

Therefore, now is a good time to pick up Alphabet shares. But what about the antitrust lawsuits? As the company's CEO Sundar Pichai said, Alphabet can appeal any court-ordered penalties against it, which could take years to sort out. And it could win the appeal.

That's what happened to Microsoft in a similar case back in 1998. The conglomerate lost an antitrust lawsuit related to its Internet Explorer browser, and a breakup of the company was ordered. But Microsoft appealed and avoided that fate.

Because these tech titans have potent AI capabilities, they are both appealing AI investments. Given the antitrust lawsuits hanging over Alphabet, based on your risk tolerance, you can assess whether you want to buy the Google parent or its competitor Microsoft.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Robert Izquierdo has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.