Alphabet or Microsoft? Analysts predict which stock will come out on top

Published Sun, Jan 22 20237:48 PM EST

The launch of Microsoft -backed ChatGPT has set the internet abuzz, and its popularity is prompting investors to wonder what it means for Google-parent Alphabet . Analysts say the platform could be a threat to Google's bread-and-butter search business . ChatGPT, created by San Franciso-based OpenAI , is an artificial intelligence chatbot able to answer questions and write essays . Alphabet and Microsoft compete in the cloud business. Neither stock did well in the past year, with Microsoft dropping more than 20%, and Alphabet tumbling over 30%. CNBC Pro spoke to fund managers and trawled through Wall Street research to find out how the two stocks might perform — and whether they have a favorite. Microsoft Gil Luria, senior software analyst at D.A. Davidson, said in a Jan. 17 report that there's some upside for Microsoft shareholders — thanks to ChatGPT, combined with Microsoft's cloud business Azure's position to handle "material portions" of the computing demand generated from ChatGPT usage. "[We] believe it offers attractive upside for buyers at current levels," he said. "With respect to Microsoft's potential incorporation of ChatGPT (and more broadly, the GPT-3.5 language model) into Bing, we believe the company has a once-in-a-decade opportunity to unseat Google's dominance and deliver a Bing tool that customers choose first for their search needs," Luria added. He gave Microsoft a price target of $270, or nearly 15% upside from the current price. Trent Masters, fund manager at Alphinity Investment Management, told CNBC Pro that both tech giants have "very powerful" underlying businesses — but he's more optimistic on Microsoft over the short to medium term. "MSFT is almost unrivalled in terms of their market positioning for productivity tools," Masters said. "Then add in the leading position in Cloud with Azure and you have a very strong business positioning." According to FactSet, analysts covering the stock gave it 21% upside on average, while 91% gave it a "buy" rating. Alphabet Masters predicted that Alphabet will lose out to Microsoft in the next year. "For Google, what has been disappointing is their inability to broaden the business away from the advertising model to date. Despite their data and AI advantages, monetising these capabilities in other areas continues to lag," he said. Similarly, Louis Navellier, chief investment officer of asset manager Navellier & Associates, said Alphabet's advertising model is "sputtering." "As a result, the cloud is key to boosting Google's profitability and the fact that the federal government recently awarded a cloud contract to Google after AWS dominated the cloud for the federal government is encouraging," he told CNBC Pro. Sean Stannard-Stockton, chief investment officer at Ensemble Capital, was more optimistic about Alphabet. He said that while the firm is experiencing lower revenue growth than expected, its profit margins remain near record highs. "Between their massive cash flow production and $140 billion of cash on their balance sheet, we have no concern about Google's ability to navigate to the other side of the current economic disruption," he wrote in a note to CNBC in early January. He said he is monitoring ChatGPT and its partnership with Microsoft's Bing as a potential threat to Google Search. "But we don't think AI chatbots are all that material of an alternative to Search," he concluded. According to FactSet, analysts covering Alphabet gave it 35% upside on average, while 92% gave it a buy rating.