Google and Microsoft are battling for the lead in AI

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Google and Microsoft are in a fierce battle to lead the AI technology and with the recent update from Google to its chatbot Bard the market has completely changed its perception of Google. It was thought that the company was lagging Microsoft, but maybe it is actually leading the AI technology race. We take a look at the AI battle between the two companies which will be one for the ages. We also take a look at the different streams of opinions forming about AI technology and what to expect in terms of regulation.


Key points in this equity note:

  • Microsoft and Google are the two leading companies competing for the lead in AI technology with Amazon, Meta, and Apple clearly lagging behind.
  • Google’s latest update to its chatbot Bard has excited investors making them completely repricing Google’s expectations in the AI race.
  • Sam Altman’s testimony in yesterday’s US Senate committee hearing indicates that regulation will soon come to AI technology.

The race for AI leadership is one for the ages

After Meta’s failed bet on the Metaverse, it should be clear by now that Google and Microsoft are the two giants battling for the lead in AI. Amazon is awkwardly off in this race and has lost its attraction among investors following its failed investments during the pandemic and failed growth bet on voice assistant technology. Apple is clearly missing from the AI race and are going after other businesses such as software for cars and health services related to its Apple Watch. The AI race kicked into gear when Microsoft on 23 January 2023 announced its $10bn investment, its third and biggest investment into OpenAI following investments in 2019 and 2021. Many thought that it was a big investment for an emerging technology that was losing money, but as OpenAI upgraded the underlying GPT system for ChatGPT things changed fast with company reaching 100mn users in the first two months of its launch, the fastest ever product adoption. Since Microsoft’s $10bn investment the market value of Microsoft has increased $521bn reflecting the market’s big growth expectations for AI technology.

Microsoft vs Alphabet (Google) | Source: Bloomberg

Was Google leading all the time?

What the price chart since 23 January 2023 also show is that Alphabet (Google) shares lost a lot of value when Google’s AI chatbot Bard made a factual error in its first demo. Immediately investors soured on Alphabet shares saying the company was behind OpenAI and would lose the AI race. Google had for years been researching heavily in AI technology and released a similar technology to ChatGPT two years ago called LaMDA. Google chose the cautious approach to AI technology because of its internal ethical boards and guidelines, but when ChatGPT was released Google had no other option than follow the lead. For years, Google’s subsidiary DeepMind, based out of London, had been making ground-breaking results in games such as Go (Chinese chess) and Stratego to the protein folding problem and recently managing tokamak fusion plasma with magnets.

Combining all of the results over the years, one could argue that Google had been leading all the time and the recent extraordinary results of the updated Bard chatbot got investors to rethink their expectations for Google in the AI race. Maybe Google was leading all the time? In a recent move, Alphabet combined the Brain AI research group with DeepMind creating a combined AI research unit consisting of 1,000 scientists. This is a formidable force in AI research and especially DeepMind’s lead in many real-life applications such as protein-folding, energy optimization for data centers, and tokamak fusion confinement make us to believe that actually Google has the upper hand. One of the defining factors in the AI race is whether it will be an enterprise or consumer led trend. Microsoft has the upper hand in enterprise distribution and software, and will thus win the AI race economically if this becomes an enterprise led trend. If it becomes a consumer led trend then Google with its many consumer application across email, search, maps etc. will win. In a recent study by Critical Mass , consumers of all ages believe that Google is leading the race.

As described above Alphabet (Google) and Microsoft are in a tight AI race and any investor in the world must decide how to get exposure to AI technology. As we have talked about in several equity notes, Nvidia is the AI equivalent of shovels back in the California gold rush, but in terms of the actual AI implementation investors must decide on investing in either Google or Microsoft. They both have the economic muscles to compete and invest in AI with Alphabet’s latest fiscal EBIT of $74.8bn while Microsoft had EBIT of $83.4bn. If we take a look at valuation then Microsoft is valued at 2.6% free cash flow yield while Alphabet is valued at 4.8% suggesting the market is betting on Microsoft for now. But as the recent price action has shown the market is also aggressively repricing Alphabet shares.

The three streams of opinions about AI

There seems to be three competing ideas about AI as to what it means for our civilization. There is the positive view of the Silicon Valley optimist that believes all technology ultimately is good for humanity and that AI technology will turn out to be extremely positive for our society. People in this camp are Yoshua Bengio (professor and computer scientist) and Yann Le Cun (Chief AI Scientist at Meta). Sam Altman, the co-founder and CEO of OpenAI which is behind ChatGPT, was initially also in this group and this is confirmed by OpenAI’s aggressive bid to release ChatGPT despite many ethical concerns over the technology. Sam Altman has since balanced his initial one-way positive attitude towards AI (see next section on AI regulation).

In the opposition camp we find the pessimists that are toying with the ideas that AI technology could lead to the downfall of our species with most notable people in this camp being Max Tegmark (professor at MIT) and recently Geoffrey Hinton, one of the early and major contributors to the current AI field, has turned significantly negative on the prospects of AI for humanity leaving his position at Google to participate in the formation of public opinion on the subject.

The last camp represents a group of scientist concerned about causality and this group claims while current AI systems are impressive in many ways they are still just correlation machines and thus are not able understand our world in any causal way. Microsoft scientists experimented with the new AI systems late last year asking the AI to stack in a stable manner a book, nine eggs, a laptop, a bottle and a nail which requires an understanding of our physical world. The answer was clever and the scientist suggested that maybe they were witnessing a new kind of intelligence. Later a group of AI sceptics added a bit of variation to the same question and saw immediately that the solution the AI provided showed that it has no understanding of the physical world.

AI regulation is coming

Sam Altman participated yesterday in a US Senate committee hearing on AI discussing many themes related to AI from regulation to copyright models. Sam Altman said that government regulation of AI is crucial to avoid the technology to become a runaway train and believes in a government AI licensing model. He also said that OpenAI is not making any money and that every time someone is using ChatGPT it loses money. He also said that he worries about the technology and especially how it could harm children.

After the committee hearing Senator Blumenthal said the US Congress cannot be the gatekeeper of AI regulation and the FTC does not have the capabilities to it, and finally AI regulation should be part of a broader technology regulation. There is no doubt that regulation of AI is needed to ensure that it is used in a correct manner and not for harming society, but with regulation comes the potential of regulatory capture by big firms and limited competition if not done correctly. Regulation has the potential benefit for the firms involved in AI that it will increase the barrier to entry and thus improve profitability.

Sam Altman also talked about the generative output of AI systems with OpenAI’s Dall-E 2 AI image generator being able to produce images from text input. The generative AI comes with two risks. The first one is the risk of copyright infringement and the lack of pay for artist as their original art has clearly been part of the training of the Dall-E 2 system. Sam Altman said that OpenAI is working on a copyright system to ensure payment to artists. The other risk from generative AI is that it will flood the Internet with AI generated content which then in the future will dominate the training samples of future AI systems. The question is whether that will naturally lead to a plateau in the development of this type of AI systems. For thing is for sure that AI will remain the most debated topic in 2023 among regulators and investors.

5-year price chart of Microsoft and Alphabet (Google)

Microsoft vs Alphabet (Google) | Source: Bloomberg

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.