The stock prices of Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOG) are going in opposite directions at the moment. While shares in the software giant are rising, shares in the Google owner are tanking.

Now, UK investors clearly see an opportunity in the latter, as they’ve been buying heavily in recent days. But I’m wondering if Microsoft could be the smarter deal right now?

Alphabet could be dead money for months

I’m bullish on Alphabet in the long term. However, I suspect the stock will be dead money for a while.

One reason for this is that there are concerns over its flagship search business after recent Q3 earnings. Alphabet is going to have to show the market that generative AI isn’t killing search and that it can monetise AI Overviews just as well as its traditional search platform. This will take time.

Another is that Wall Street analysts are cutting their price targets for the stock. This kind of broker activity typically weighs heavily on a company’s share price.

There’s also the fact that the company is spending a ton of money on AI with no guarantee that it will pay off. This is hurting sentiment towards the stock.

Finally, there’s no share price momentum at the moment. So, Alphabet isn’t going to see much interest from momentum-tracking funds (which account for a lot of flows today).

So, while I see strong potential here over three to five years, I think near-term performance is likely to be underwhelming. We could easily be looking at a year or so of flat returns.

Microsoft has all the momentum

Looking at Microsoft, it’s a very different set-up. It recently produced better-than-expected earnings in which it forecast strong AI-related cloud growth.

Meanwhile, you could say that it has ‘read the room’ in terms of investor sentiment towards AI spending. While other Big Tech companies like Meta and Alphabet are scaring off investors with negative free cash flow, Microsoft reported $18.6bn in positive free cash flow last quarter.

This is a big deal. Because institutional investors pay a lot of attention to free cash flow.

Microsoft is offering the best of both worlds: better growth from AI but without the high debt burden risk.
Analysts at Barclays

Another attraction here is that analysts are raising their price targets. Since its earnings report, more than 20 firms have lifted their forecasts with several going to $700 or higher (versus $520 now).

Finally, the stock has positive momentum. So, it’s going to see inflows from momentum-tracking funds.

Put all this together, and I think it’s likely that Microsoft will provide better returns than Alphabet over the next six months. It may be a little more expensive valuation wise (it has a price-to-earnings (P/E) ratio of 26 versus 14 for Alphabet) and there are some risks around AI disruption, but ultimately the fundamentals look much stronger.

Why choose one?

Of course, investors don’t need to choose one name only. They could easily invest in Alphabet as a long-term value play and Microsoft as a rising momentum play.

Personally, I think both are worth considering today. I’ve got both in my own portfolio and I see them as core holdings.

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Edward Sheldon owns shares in Alphabet and Microsoft.