Alphabet vs. Microsoft: The Better Growth Stock to Buy During the Great Rotation

While the "Great Rotation" is starting to see a shift away from fast-growing artificial intelligence (AI) stocks, let's not write off megacap growth stocks just yet. One of the biggest drivers of long-term returns is still innovation.

In megacap tech, the companies best positioned to lead the next decade aren't just the ones seeing solid revenue growth today; they're the ones building tomorrow's platforms. And by that measure, the gap between Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) may be wider than it first appears.

Both companies' platforms are deeply entrenched in our everyday lives, they are both highly profitable, and both are aggressively investing in AI. However, one company is clearly much better positioned for the future.

Image source: The Motley Fool.

Alphabet: The market innovator

When it comes to innovation, few companies can match Alphabet. The company is best known for its Google search engine, but it is much more than that.

The company is the world's largest digital advertiser, which feeds not only into search engines but also its YouTube video platform and other properties. Google Search is also supported by its ownership of the world's market share-leader browser in Chrome and smartphone operating system in Android. It also owns the world's third-largest cloud computing business and a majority stake in its robotaxi unit Waymo.

What really sets the company apart, though, is the leadership it's established in AI. It is the only company with both world-class AI chips and models.

Its biggest advantage in AI stems from its Tensor Processing Units (TPUs), which are custom chips it developed more than a decade ago and which it has built its entire hardware and software ecosystem around. Its chips are the closest to challenging Nvidia's graphics processing units (GPUs), and give Alphabet a huge cost advantage with large language model (LLM) training and running inference. Meanwhile, it uses these chips to train its top-notch Gemini model, which creates a natural flywheel effect, given the cost advantage it has in deploying its own chips.

Alphabet is seeing solid growth, but it is still in the early innings of monetizing its various AI opportunities.

Microsoft: An established leader

Microsoft is an established leader in both enterprise software and cloud computing. Meanwhile, the company made a very smart, large, early investment in OpenAI. This investment has helped fuel Microsoft's cloud computing and enterprise-software growth, with the latter powered by its AI Copilot assistants.

Microsoft now has a more than 25% stake in OpenAI's for-profit business and intellectual property rights to its model and products through 2032. Microsoft also got $250 billion in incremental cloud computing commitments as part of its role in its recapitalization into a public benefit corporation.

However, with its reliance on OpenAI, Microsoft fell behind with its own AI innovations. Microsoft is now trying to play catch-up by developing its custom AI chips and models, but it has a long way to go, especially with its own chips.

The winner

Microsoft and Alphabet share many similar characteristics. They both are undisputed market leaders in their core businesses, have fast-growing cloud computing units, and have strong balance sheets. Microsoft's execution, particularly in enterprise software and cloud, has been exceptional, and it remains a core holding for many long-term investors.

That said, the biggest long-term winner will be the company that will drive technological change going forward, and that is Alphabet. Microsoft did well by hopping on the OpenAI train, but Alphabet has been the company that has been at the forefront of innovation. It has the most complete AI stack, with its TPUs and Gemini model, while also leading the charge on emerging technologies like robotaxis (with Waymo) and quantum computing (with its Willow chip). That innovation, combined with its still-underappreciated monetization potential, makes it the most compelling long-term growth story among megacap tech stocks.

For investors willing to look beyond near-term trends and focus on which company is poised to shape the future, Alphabet is the stock you want to buy and hold for the long haul, as investors temporarily rotate out of tech.

Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.