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Microsoft Vs. Google: Which Stock Is The Better Buy? (NASDAQ:GOOG) – Seeking Alpha


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Microsoft (MSFT) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) are two of the most successful technology companies of the 21st century, and their stocks are widely held by institutional and retail investors alike. While Microsoft and Alphabet have been secular compounders for the last two decades, investors are experiencing a rough start to 2022, with both of these stocks being down more than 20% YTD (entering bear-market territory in May).
Over the last ten years, Microsoft and Alphabet have dipped by more than 20% from their highs just once, and that was during the COVID crash of March 2020. With inflationary pressures forcing global central banks into tighter monetary policies, the threat of a global recession looms large. In this uncertain macro environment, robust free cash flow generation and pristine balance sheets render Microsoft and Alphabet solid bets for most investors.
Microsoft reported outperformance in each and every one of its business segments in Q1 2022, and Alphabet’s quarter was just as good, barring weaker-than-expected numbers for YouTube. Microsoft and Alphabet are fantastic businesses, but I clearly like one stock more than the other. Read on to find out which one.
In the digital era, technology is ubiquitous, and both Microsoft and Alphabet command incredible business moats in their serviceable addressable markets. Over the last twelve months, Alphabet has done ~$270B in revenue, while Microsoft raked in $192B during the same period. In Q1, Alphabet’s revenue grew at 24% y/y (marked deceleration in growth rates), and Microsoft’s revenue grew at 18% y/y (steady growth). For the rest of 2022, both companies are projected to do similar growth of ~17-18%.
While Alphabet’s revenue is greater than Microsoft’s, the latter’s superior margin profile leaves both companies with a very similar free cash flow profile. In Q1 2022, Alphabet and Microsoft recorded free cash flows of $68.9B and $63.6B, respectively.
Both Alphabet and Microsoft have pristine balance sheets with net cash positions of $119B and $55B. Also, the capital return programs at these tech titans are also nearly identical in size: Alphabet ($52B TTM stock buyback) and Microsoft ($30B TTM stock buyback + $18B TTM dividends).
However, there’s one big reason to buy Alphabet over Microsoft, and that is valuation. Today, Alphabet is trading at a P/E ratio of ~20.8x (slightly above QQQ’s long-term P/E ratio of ~18x). On the other hand, Microsoft is trading at a P/E ratio of ~26.9x (a significant premium to Alphabet).
Now, Microsoft bulls are likely going to berate me about using relative valuation to choose among two very different businesses (with some overlap in the Cloud (IaaS+PaaS) market). And some of you might argue that Microsoft deserves a premium for its quality. However, the significant valuation spread between Alphabet and Microsoft observed in the chart above is only seen in the last twelve months or so. See below:
Historically, the spread between Microsoft and Alphabet’s trading multiples has been much narrower and mostly in favor of Alphabet. Today, Alphabet is trading at the lowest P/E multiple in its history, while Microsoft is still trading at a premium. Alphabet is growing faster than Microsoft, and both of these companies have very similar future revenue (and FCF) growth trajectories. Due to its lower valuation, Alphabet’s capital return program is also a lot more effective than that of Microsoft at boosting shareholder returns. Therefore, I like Alphabet a lot more than Microsoft at this moment.
In my view, both Alphabet and Microsoft are solid buys after their respective stock price corrections in 2022. However, with multi-decade high inflation driving interest rates higher, the sell-off (reversion to the mean) in tech stocks may not be over yet. The long-term mean P/E of QQQ is around 18x, which is where Alphabet and Microsoft could be headed if macro headwinds persist (and they could go even lower). As we saw today, Alphabet and Microsoft have identical free cash flow generation and capital return programs, with Alphabet having a stronger balance sheet. I understand the stickiness of Microsoft’s enterprise offerings, but Alphabet’s search and ads business are equally robust. Considering relative valuations and the possibility of a mean reversion, I think Alphabet is a much safer buy here compared to Microsoft (with the premise of an impending recession). Hence, I prefer Alphabet over Microsoft.
Key Takeaway: I rate Alphabet a buy at $2,288.
Thank you for reading. Please feel free to share any questions, concerns, or thoughts in the comments section below.
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This article was written by
Ahan Vashi is the Head of Equity Research at L.A. Stevens Investment LLC’s Seeking Alpha Marketplace service – Beating The Market. He is a “Quantamental” investor who specializes in identifying market-beating stocks by capitalizing momentum of business fundamentals. Some of his top picks include Upstart at $58, Palantir at $9, and Asana at $22.
Prior to joining L.A. Stevens Investments, Ahan worked as an Associate Fellow with Jacmel Growth Partners, a middle-market private equity firm where he acquired the art of analyzing financial statements and business valuation. Ahan holds a Master of Quantitative Finance degree from Rutgers Business School and a Bachelor of Technology degree in Electronics and Communication Engineering from NIT, Surat.
At Beating The Market, Ahan works with Louis Stevens, Jared Simons, and one of the most vibrant and dynamic investment communities on earth in pursuit of identifying the next Facebook, Amazon, and Salesforce. Beating The Market brings the potent wealth-creating power of Venture Capital to the public markets. For his part on the team, Ahan does this by systematically analyzing hundreds of public companies each year via BTM’s rigorously defined set of 23 standards/criteria – BTM’s Crucial Characteristics. 
In addition to high-growth companies, Ahan works on identifying dividend-growth stocks that can deliver supercharged returns with low volatility via massive capital return programs (dividends and buybacks). Most of Ahan’s public articles tend to focus on this area, while his research on high-growth companies is available exclusively to members of Beating The Market. 

If you’d like “Ahan-lite”, check out his Twitter profile here: https://twitter.com/VashiAhan

If you have any questions, feel free to reach out to him via a direct message on SA or leave a comment in one of his articles!

Disclosure: Ahan Vashi is a promoting contributor for Louis Stevens’ SA Marketplace service – Beating The Market
Disclosure: I/we have a beneficial long position in the shares of GOOG, GOOGL, MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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She has been writing columns on consumer gadgets for over 2 years now. Her areas of interest include smartphones, tablets, mobile operating systems and apps. She holds an M.C.S. degree from Texas A&M University.