Alphabet vs Microsoft: AI Battle Intensifies While Investors See Potential Gains

The artificial intelligence (AI) space saw significant activity in 2023, with major tech giants like Microsoft and Alphabet leading the news. These two companies, along with others that form the so-called 'Magnificent Seven' (including Apple, Tesla, Meta Platforms, Amazon, and Nvidia), captured the majority of market attention.

Microsoft's substantial investment of $10 billion in OpenAI brought ChatGPT to the forefront, positioning them as major players in the generative AI race. Alphabet wasn't far behind and introduced its own AI model named Bard, although its debut received mixed reviews due to accuracy issues. Despite this, Alphabet continued to innovate and recently launched a new AI product called Gemini, signaling its readiness to compete in the AI realm.

This development suggests that Alphabet is making strategic moves to challenge Microsoft's position and leverage its AI capabilities to improve its wide array of services—from Google Search and Gmail to YouTube and cloud offerings. Investors and tech enthusiasts are watching closely to see whether Alphabet's Gemini can outdo Microsoft's offerings in the AI space.

The AI Market's Growth Potential

Estimates from analysts at Goldman Sachs suggest that generative AI could add as much as $7 trillion to the global GDP over the next decade, spiking interest across the financial sector. High-profile investors like Bill Ackman have expressed confidence in Alphabet's ability to embed AI throughout its ecosystem, which could make its services more integral than ever before. This could indicate that Alphabet's products may become even more appealing to consumers and businesses alike, potentially validating the bullish stance on the company.

Yet, it's important to recognize that Microsoft's ecosystem also holds significant potential. Its latest financial reports showed a surge in demand for its AI applications, largely driven by its association with OpenAI, and by extension, Azure cloud services. These trends point to a growing market that might be too premature to call for a winner in the generative AI space.

Examining Alphabet's Market Valuation

When evaluating Alphabet's stocks, their forward price-to-earnings (P/E) ratio stands out prominently against its rivals, presenting a lower valuation that might attract investors. Alphabet's stock, with a forward P/E of 23, contrasts with Microsoft's higher forward P/E of 33, signaling that the market might be undervaluing Alphabet's potential. Additionally, Alphabet's price-to-free-cash-flow ratio suggests that its stock could be trading at a discount, offering a potential opportunity for investment, especially given its proven capacity for cash flow generation which supports investments in burgeoning fields like AI.

The Verdict on Alphabet's Stocks

While Alphabet stocks seem undervalued when considering the broader future AI-powered landscape, it's crucial to understand the influence of their core online advertising business. Assumptions that ChatGPT might overtake Google Search do not fully take Alphabet's dominance into account — Google and YouTube remain the world's most visited websites, with vast implications for advertising, particularly in the political domain.

The AI market is large and evolving, and as such, is likely to have multiple victors. With Alphabet's stock currently at what could be a low point, it could be an opportune time to invest. Both the short-term and long-term outlooks are promising, and investors might find value in the current low trading multiples and consider dollar-cost averaging into Alphabet shares.

AI, Alphabet, Microsoft