Microsoft Stock vs. Alphabet Stock: Which Is a Better Buy?

Not a day goes by without some company making headlines about its push into artificial intelligence, along with investors wondering how they can work with this push.

Microsoft MSFT and Google parent company Alphabet GOOGL are often mentioned in the same breath as leaders in the artificial intelligence arms race. But as Morningstar senior analysts Dan Romanoff (who covers Microsoft) and Ali Mogharabi (who covers Alphabet) warned in a recent conversation, investors shouldn’t expect AI to have an outsized impact on the results of either of these two tech titans any time soon.

That said, both analysts agree that the best way to profit from AI in the long term is through companies like these, which already hold strong market positions and have been in AI for years. They are hyperscalers with the significant hardware and infrastructure required to succeed in this field.

So is it a good time to buy Microsoft stock, or is Alphabet a better buy? Here’s how the two firms score on a few of Morningstar’s key investment metrics as of June 27, 2023.

Microsoft

• Price/Fair Value Ratio: 1.01
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary

Alphabet

• Price/Fair Value Ratio: 0.77
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide
• Morningstar Capital Allocation Rating: Exemplary

Who wins the stock matchup depends on what Morningstar metrics matter most to an investor. Let’s take a deeper dive into a few of those metrics.

Price/Fair Value Winner: Alphabet

For each company they cover, Morningstar analysts calculate a fair value estimate, which represents the intrinsic value of the company’s stock based on how much cash they think it can generate in the future. A stock’s price/fair value ratio is simply its current market price divided by that fair value estimate. A stock trading below 1.0 is undervalued, one trading around 1.0 is fairly valued, and one trading above 1.0 is overvalued.

We think that at the moment, Microsoft’s stock is about 1% overvalued while Alphabet’s stock is 23% undervalued, meaning Alphabet is trading at a more attractive price.

Uncertainty Winner: Microsoft

An Uncertainty Rating represents the predictability of a company’s future cash flows, and therefore the level of confidence Morningstar has in our fair value estimate for its stock. Companies that enjoy predictable sales, modest operating and financial leverage, and limited exposure to contingent events carry lower ratings, while those with less-predictable sales, significant leverage, and significant exposure to contingent events carry higher ratings.

Our analysts think Microsoft’s cash flow uncertainty is currently Medium, while Alphabet’s is High. This means Microsoft wins this round since we’re more confident in our fair value estimate of its stock.

Economic Moat Winner: Tie

The Morningstar Economic Moat Rating represents a company’s maintainable competitive advantage. Having an economic moat means a company can fend off competition and earn high returns on capital for many years to come. A company with competitive advantages that we expect to last more than 20 years has a wide moat. A firm that can fend off its rivals for 10 years has a narrow moat. One with either no advantage or an advantage we think will quickly dissipate has no moat.

Our analysts believe that both Microsoft and Alphabet have carved out wide economic moats.

Capital Allocation Winner: Tie

The Morningstar Capital Allocation Rating represents our assessment of how well a company manages its balance sheet, investments, and shareholder distributions. Analysts assign each company one of three ratings—Exemplary, Standard, or Poor—based on their evaluations of how well a management team provides shareholder returns. Adept corporate managers can make a good company even better.

Both Microsoft and Alphabet earn our top rating of Exemplary for their capital allocation.

Which Is the Best Stock to Buy?

From Morningstar’s perspective, the “winner” of any stock matchup is the one trading at the largest discount to our fair value estimate after being adjusted for uncertainty—a judgment encapsulated by Morningstar Ratings. Stocks rated 4 or 5 stars are considered undervalued after being adjusted for uncertainty. Stocks rated 3 stars are believed to be fairly valued. Stocks rated 1 or 2 stars are thought to be overvalued.

As of this writing, Microsoft stock has a 3-star rating, while Alphabet stock has 4 stars. This means that from Morningstar’s perspective, Alphabet is currently the better stock to buy.

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