Alphabet vs. Microsoft: Better AI Stock to Own in 2026?

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) are two of the largest cloud computing companies in the world, and both have been seeing strong growth as a result of artificial intelligence (AI). However, in 2025, Alphabet's stock clearly shone; it's up around 65% as of this writing, compared to about a 16% gain for Microsoft.

Let's see which stock is best positioned to outperform in 2026.

The case for Microsoft

Microsoft was hitting on all cylinders in 2025, although its stock still slightly trailed the performance of the S&P 500 heading into the final week of trading. Last quarter, the company grew its total revenue by 18% year over year and its adjusted earnings per share (EPS) by 23%, as it saw strength across segments.

The growth is being led by its cloud computing unit, Azure, which has been the fastest growing of the big three cloud providers. Last quarter, Azure revenue surged 40%, driven by demand for AI services. It was the ninth consecutive quarter of 30% or more growth for Azure. Growth could have been even more robust if Azure were not capacity-constrained, and Microsoft said, given accelerated demand, that its capital expenditures (capex) will now grow at a quicker pace in fiscal 2026 versus last year.

Microsoft continues to have strong ties to OpenAI, with whom it owns a 27% stake. It also has exclusive intellectual property rights and privileged application programming interface access to its large language models (LLMs) through 2032. This, combined with OpenAI making an additional $250 billion in computing commitments, should help continue to drive strong growth in the coming years. The company has also struck a deal with Anthropic.

At the same time, Microsoft has incorporated OpenAI's technology throughout its products -- such as its AI assistant copilots -- which is also helping to drive growth. An expected July price hike for Microsoft 365 enterprise users should boost revenue next year.

The case for Alphabet

Similar to Microsoft, Alphabet's growth is being led by its cloud computing unit, Google Cloud. Last quarter, Google Cloud revenue soared 34%, while its segment operating income surged 84%. Although its revenue growth is a bit slower, the company has some strong advantages that should start to become more pronounced in 2026.

Its biggest edge is its custom AI chips, called Tensor Processing Units (TPUs). While Microsoft has developed its own custom AI chips, they are far behind Alphabet's TPUs, which were created more than a decade ago and have been tightly woven into its system. This gives it a large structural cost advantage over Microsoft, which is still reliant on Nvidia's graphics processing units (GPUs). Alphabet's TPUs are so good that Anthropic has placed a big order for them to run some of its AI workloads.

Alphabet has also developed Gemini, one of the top LLMs in the world and another long-term advantage over Microsoft, which largely depends on OpenAI. This gives it not only more flexibility as it incorporates Gemini throughout its products but also more revenue streams. Meanwhile, by having both top-tier chips and AI models, Alphabet has created a flywheel effect that Microsoft just does not have.

Image source: Getty Images.

The verdict

Alphabet and Microsoft trade at similar valuations. Alphabet trades at a forward price-to-earnings (P/E) ratio of 28 times 2026 analyst estimates, while Microsoft trades at 30 times fiscal 2026 (ending June 2026) estimates and 26 times fiscal 2027 estimates. Given their valuation and growth outlooks, I think both stocks can perform well next year.

However, I think that, ultimately, Alphabet's stock will once again outperform. The company has a long-term advantage in having the most complete AI tech stack, and that should become more noticeable next year, especially if it starts renting out its TPUs to more customers. Meanwhile, if Google search revenue continues to accelerate, driven by its AI initiatives, investors will likely start to bid up the stock.

Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.