Why Microsoft Stock is Officially a Better Long-Term Pick Than Google

The fact that Alphabet’s stock has outperformed Microsoft’s by more than four to one since the beginning of 2023 is truly peculiar. During that time, Google’s stock increased by more than 250%. With revenue growth of 44% compared to Google’s 31%, Microsoft only managed 56%. On a Tuesday morning, if you looked at those figures long enough, you would probably begin to wonder if the markets are really paying attention.

It’s possible that investors were so engrossed in the story of Google’s AI comeback, Gemini’s media attention, and the search engine drama involving OpenAI that they failed to notice what was quietly taking place in Redmond. The kind of noise that attracts cable news segments wasn’t coming from Microsoft. It was operating a business empire that is nearly impossible to overthrow, which is something more subtle.

The infrastructure is essentially the same whether you walk through a corporate office anywhere in the world. Someone’s screen has Word open. In a conference room, PowerPoint is loading. Excel is being misused in ways that its designers could not have predicted.

These purchases are not optional. The pipes are owned by Microsoft, and they are utilities. Over the course of ten years, that type of market position compounds into something formidable, but it doesn’t appear clearly in a single quarter’s earnings.

It’s worth taking a moment to consider the cloud numbers. In its most recent quarter, Microsoft’s Intelligent Cloud division reported $32.9 billion, with Azure growing at a rate of 39%. At a dazzling 48% growth rate, Google Cloud earned $17.7 billion, which is undeniably impressive.

However, for the first time, Microsoft’s total cloud revenue exceeded $50 billion in a single quarter. You don’t just happen to reach that milestone. AI is now speeding up what was already a massive flywheel in a business that has been methodically absorbing enterprise spending for years.

The margin story, on the other hand, receives surprisingly little attention. Microsoft has a 39% net income margin. Despite being healthy, Google’s score is 33%. Oracle can’t match Microsoft’s operating margin of 46.7% at 31.9%, despite all of its aspirations and growth forecasts.

Maintaining those margins while making significant investments in AI infrastructure suggests something more than just sound accounting for a company the size of Microsoft. It implies real operating leverage, the kind that results from offering the same software at a low marginal cost to millions of business clients.

There is a perception that Microsoft has been priced by the market as a business that faces an existential threat from AI rather than as one that might gain more from AI than nearly everyone else. One statistic worth considering is the 15 million paid Copilot seats. They’re not test users. These companies are paying for productivity software with AI built in on top of an already-existing Microsoft 365 partnership.

No expense for acquiring new clients. simply margin that enters an already-existing revenue stream. Prior to Microsoft’s April 29 earnings, Bernstein analysts emphasized that no AI coding tool, no matter how powerful, can replace the core software and cloud infrastructure that businesses rely on on a daily basis.

Meanwhile, it seems harder and harder to defend the valuation gap. Alphabet’s price is about 29 times its earnings. It’s strange to find one of the world’s most profitable companies at 23x, which is near where the larger S&P 500 trades.

Do you think Microsoft is a better-than-average company? is the straightforward question posed by Matt Stucky of Northwestern Mutual. Because it is currently priced similarly to an average one. There’s something about that framing that breaks through the clutter.

It’s difficult to ignore the fact that a company with a $625 billion total commercial backlog, of which about 45% is related to OpenAI contracts, is being viewed with the same skepticism that is typically reserved for companies that are contracting.

Analysts have noted that Microsoft is purposefully rerouting compute capacity toward internal developers and first-party applications, even though Azure may not be growing at a 50% rate. That is a trade-off between long-term margin expansion and short-term growth. The reasoning behind that wager isn’t illogical, but it’s still unclear if it will pay off.

Google is not a bad company. That must be stated clearly. In a single quarter, ad revenues of $82.3 billion demonstrate exceptional commercial dominance. However, that exposure is reciprocal. Google is particularly affected if consumer spending declines and the advertising market shrinks.

When sentiment shifts, Microsoft’s enterprise clients continue to pay for Azure. During a recession, they don’t cancel their Office subscriptions. The value of that resilience often comes to light just when no one anticipates it.

Observing this over the last two years paints a picture of a company that has been subtly misinterpreted rather than one that is in decline. The average price target set by Wall Street for Microsoft is approximately $586, suggesting a 50% increase from current levels.

That’s not just the opinion of one hopeful analyst. The consensus is that. Jefferies reached $675. Morgan Stanley to $650. These are not insignificant figures from organizations with a reputation for carelessness.

It takes a lot of patience to keep Microsoft afloat during a time when Google is making headlines. Seldom are markets early. However, the structural case—the dominance of the cloud, the integration of AI into current business relationships, and the margins that rivals can hardly match—does not vanish just because a stock has been flat for a year. It becomes more intriguing, if anything.