The Motley Fool·2025-12-30 04:00Core Viewpoint - Alphabet's stock significantly outperformed Microsoft in 2025, with a 65% increase compared to Microsoft's 16% gain, raising questions about which company will lead in 2026 [1] Microsoft Overview - Microsoft experienced strong performance in 2025, with total revenue growth of 18% year over year and adjusted earnings per share (EPS) growth of 23% [2] - The growth was primarily driven by its cloud computing unit, Azure, which saw a 40% revenue surge, marking the ninth consecutive quarter of over 30% growth [3] - Microsoft is facing capacity constraints in Azure, prompting an increase in capital expenditures (capex) for fiscal 2026 [3] - Microsoft maintains a 27% stake in OpenAI and has exclusive rights to its large language models (LLMs), which is expected to support future growth [4] - The integration of OpenAI's technology into Microsoft products, along with a planned price hike for Microsoft 365 enterprise users, is anticipated to boost revenue [5] Alphabet Overview - Alphabet's growth is also led by its cloud computing unit, Google Cloud, which reported a 34% revenue increase and an 84% surge in segment operating income [6] - Alphabet's competitive advantage lies in its custom AI chips, Tensor Processing Units (TPUs), which provide a structural cost advantage over Microsoft's reliance on Nvidia's GPUs [7] - Alphabet has developed Gemini, a leading LLM, which offers flexibility and additional revenue streams compared to Microsoft's dependence on OpenAI [8] Valuation and Outlook - Both Alphabet and Microsoft have similar valuations, with Alphabet trading at a forward price-to-earnings (P/E) ratio of 28 and Microsoft at 30 for fiscal 2026 [10] - Alphabet is expected to outperform in 2026 due to its comprehensive AI technology stack and potential revenue growth from AI initiatives, particularly if it begins renting out its TPUs [11]