At the end of 2022, artificial intelligence (AI) mania exploded with the release of ChatGPT. The market scrambled to work out who would profit, and soon the narrative was set that Microsoft (US:MSFT) and Nvidia (US:NVDA) would be the main winners. The logic being that Microsoft was the main investor in ChatGPT’s creator, OpenAI, and that everyone would soon be needing more of Nvidia’s graphics processing units (GPUs) to train rival AI models.
- Search business showing continued strength
- Google Cloud growing faster than rivals
- Margins benefiting from improved efficiency
- Trading at a big discount to peers
- Regulatory risk from ongoing antitrust case
- Large capex bill next year
The flipside of this story was that Google would suffer. Instead of everyone using its search engine, the expectation was that people would switch to chatbots when looking for answers. In December 2022, Microsoft was valued at 24 times its forward earnings, while Google’s parent company, Alphabet (US:GOOGL), traded on 19 times. Since then, these valuations have diverged even further, with Microsoft’s multiple expanding to 31 times while Alphabet’s has only crept up to 21.