Alphabet Inc. (NASDAQ:GOOGL), commonly referred to as “Google”, along with Microsoft Corporation (NASDAQ:MSFT), are probably names that you’re familiar with (even if you’re not into the US market.)

In my personal opinion, there are a number of similarities in these 2 tech giants, namely:

• “Office” suite of products (for Alphabet’s G Suite, it comprises of Gmail, Google Drive, Google Docs, Sheets, Slides, etc.; for Microsoft’s Office Suite, it comprises of Outlook, OneDrive, Microsoft Word, Excel, PowerPoint, etc.)
• Online meeting platform (Alphabet’s Google Meet vs. Microsoft’s Microsoft Teams)
• Operating System (Alphabet’s Android Operating System vs. Microsoft’s Windows Operating System)

While both are great companies (again in my personal opinion, where at this point of writing I’m invested in Alphabet Inc.), if you only like to invest in one out of the two, which one will it be?

The best way to base your decision on will be their historical performances – and in this post, you’ll find my comparison of both companies’ financial performances (total revenue and net profit, along with its gross and net profit margin growth), Return on Equity, cash flow performance (whether the company is in a net cash/debt position, along with their free cash flow per share), along with dividend payout over the last 5 financial years (for Alphabet Inc. it will be between FY2017 and FY20221, as it has a financial year end every 31 December, and for Microsoft Corporation it will be between FY2017/18 and FY2021/22, as it has a financial year end every 30 June.) Finally, I’ll also be finding out which of the 2 tech companies is a better buy at their current traded price based on their current valuations.

Let’s begin:

Financial Performance

Revenue & Net Profit (US$’mil):

Alphabet Inc:

Microsoft Corporation:

My Observations: As you can see from the 2 tables above, both tech companies managed to grow their total revenue and net profit over the past 5 years.

In terms of their compound annual growth rate (CAGR), they are as follows:

For Alphabet, its total revenue and net profit grew at a CAGR of 18.37% and 43.12% respectively.

For Microsoft, its total revenue and net profit grew at a CAGR of 12.43% and 34.43% respectively.

Looking at the above, it seems that Alphabet is a clear winner here as its CAGR for its total revenue and net profit over the last 5 years are both superior.

Gross and Net Profit Margins (%):

Alphabet Inc:

Microsoft Corporation:

My Observations: Microsoft Corporation is a clear winner here in terms of its gross and net profit margin performance over the last 5 years – in terms of gross profit margin growth, it has been maintained at 60+% and improving in 4 out of the 5 year period I have looked at (compared to Alphabet’s, which have been at a 50+% range, and on a downward decline in 4 out of 5 years); for it net profit margin, even though it have fluctuated slightly, it has largely moved in the 30+% range, which is way better than Alphabet’s (which is at around the 20+% range.)

Return on Equity

In layman terms, Return on Equity (RoE) is the amount of profits (in percentage terms) a company is able to generate for every single dollar of shareholders’ money it uses in its businesses.

Personally, my preference is towards companies that have been able to maintain its RoE at a level of 15.0% or better over the years.

With that, let us take a look at both Alphabet and Microsoft’s RoE performance over the last 5 years:

Alphabet Inc:

Microsoft Corporation:

My Observations: Again, Microsoft Corporation emerged on top here, as its RoE is way superior than Alphabet’s over the last 5 years.

Cash Flow Performance

Apart from its financial performance, another aspect I focus my attention on when I review a company is its cash flow performance (as cash is the lifeblood of every business.)

In this section, I will be taking a look at whether or not the 2 tech companies are in a net cash/debt position, and also their free cash flow per share, as follows:

Net Cash/Debt (US$’mil):

Alphabet Inc:

Microsoft Corporation:

My Observations: Alphabet Inc. is a clear winner here, as it has maintained a net cash position over the years (even though in the last 3 years, its net cash position has been on a downward decline.)

Another thing to note is that even Microsoft is in a net debt position throughout the 5 years I have looked at, it has been improving.

Free Cash Flow/Share (US$/share):

Alphabet Inc:

Microsoft Corporation:

My Observations: Both companies’ free cash flow/share have improved over the years (even though Micosoft’s performance is slightly better here as it has exhibited year-on-year improvement throughout the entire 5 year period, while Alphabet saw a dip in its free cash flow per share in FY2018.)

In terms of the CAGR, Alphabet’s is at 24.09%, while Microsoft’s is at 14.95% – so Alphabet edged out here.

Dividend Payout to Shareholders

As Alphabet Inc’s management has not declared a dividend payout to its shareholders throughout the entire 5 year period, while Microsoft Corporation’s management declares a dividend payout on a quarterly basis, it is the winner here.

However, do take note that if you are a Singaporean, all dividend payouts you receive are subjected to a 30.0% withholding tax – meaning the dividend payouts that you eventually get will be 30.0% less than the amount declared.

The following table is Microsoft Corporation’s dividend payout over the last 5 years:

My Observations: Microsoft’s management have increased the company’s dividend payout every single year over the last 5 years, and growing at a CAGR of 8.1%.

Which is the ‘Cheaper’ of the 2 Tech Giants?

The following table is a side-by-side comparison of the 2 tech giant’s current traded price (at market close on 26 August 2022), along with their current valuations:

My Observations: Looking at their current valuations, it’s clear that Microsoft Corporation is currently the more ‘expensive’ among the 2 tech companies, due to its higher P/E and P/B ratios.

Closing Thoughts

If you were to ask me, my opinion is that both companies have their fair share of strengths in terms of their performances in the last 5 years – for Alphabet, it recorded a better performance in terms of its total revenue and net profit growth. The company also maintained a net cash position through the 5-year period, as well as recorded a better improvement in terms of its free cash flow/share performance.

For Microsoft, its gross and net profit margin, as well as its return on equity recorded a better performance over the 5-year period I have looked at. Also, the management of the company also pays out a dividend to its shareholders on a quarterly basis (while Alphabet’s management did not declare any.)

Finally, Alphabet is currently the ‘cheaper’ of the 2 due to its lower P/E and P/B ratios compared to Microsoft.

With that, I have come to the end of my comparison between the 2 US tech giants. Do take note that all the information above is purely for educational purposes only, and they do not represent any buy or sell calls for any of the companies. You should always do your own due diligence before you make any investment decisions.

Disclaimer: At the time of writing, I am a shareholder of Alphabet Inc.