Google vs. Microsoft — one has triple the potential returns

ChatGPT has become the fastest-growing internet application in history, kicking off a cycle of AI hype that has driven some investors out of their minds.

Microsoft is spending a lot on AI, but Google is spending far more and may sink as much as $300 billion into improving its AI tech through 2028.

Both Google and Microsoft are likely AI champions of the future that will use the technology to cement their strong positions in cloud computing.

But one of these tech titans has superior valuation, a faster long-term growth rate and a projected 24% annual return potential over the next three years. It’s clearly the better buy.

Despite Google’s shaky launch of its AI chatbot Bard, the AI hype cycle has created an opportunity for Google even as the onset of high-profile competition threatens the tech giant’s prestige as the leader in the industry, says Wells Fargo analyst Brian Fitzgerald.

Google has a tech lead in conversational AI and any notion they’re playing catch-up is “naive,” Fitzgerald says.

The Watson-like Bing AI

Some think Microsoft’s decision to integrate OpenAI’s product into Bing is game-changing or even world-changing—like the introduction of the iPhone.

IBM’s former CEO, Ginni Rometty, hailed Watson as a world-changing “moon shot” that would diagnose cancer, forever alter established industries and even create new industries.

For 30 years, IBM has prided itself on generating more patents than any other U.S. company. But stockholders haven’t benefitted from those much-hyped patents or from Watson.

In the limited time since ChatGPT has taken the world by storm, there’s zero evidence AI is going to move the needle for Microsoft.

Clearly, the better buy Google is generating higher free cash flow than Microsoft. It’s growing faster and spending more on R&D that literally could change the world.

Google’s growth is similar to Microsoft’s except in free cash flow, where it’s expected to deliver Buffett-like growth of 18% annually through 2028.

Historically, Google is worth about 26X earnings and today trades at 18.3 but just 10.8X cash-adjusted earnings.

• 0.74 cash-adjusted price-toearnings growth (PEG) ratio

• Secure growth at a wonderful price

Microsoft is historically worth 26X earnings in the Nadella cloud computing era and today trades at pretty much fair value and a cash-adjusted PE of 18.2.

Two long-term champs

The near-hysteria over AI that has rocked the nation for the last few months seems sure to disappoint speculators who think they can get rich quickly with this exciting new technology.

Don’t get us wrong; AI is the future. It promises to revolutionize pro- ductivity, automation, data analysis, drug development and just about every other industry on Earth.

But as fun and impressive as ChatGPT can be, Bing will not take the search crown from Google. The data is clear. Bing has NOT been gaining market share even after Microsoft paid $10 billion for a splashy headline about its latest investment in OpenAI.

• An investment that will likely pay off at some point in the future

• Though largely because Microsoft will incorporate the technology into cloud computing, not search.

But for new money today, the better buy is clear; Google is a smart way to play the recent AI hype with a strong margin of safety.

The two companies offer similar long-term return potential. Google’s prodigious free cash flow, expected to grow nearly 20% annually through 2028, will eventually make it one of the best dividend growth blue chips of the future.

—Reprinted from Dividend Sensei, a Seeking Alpha Marketplace newsletter. Edited for brevity and republished with permission from Seeking Alpha.