Microsoft Preferred Over Alphabet for Long-Term Retirement Investment

Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are both leading players in the AI space, but one analyst argues Microsoft is the better long-term retirement holding. Despite Alphabet's impressive 40.91% gains over the past year and a cheaper valuation multiple, Microsoft's durability and financial strength make it the preferred choice.

Alphabet's bull case includes strong recent performance and a lower price-to-earnings ratio of 15 times trailing earnings, compared to Microsoft's 29. However, this multiple is skewed by a one-time unrealized gain on equity securities. On forward earnings, the gap narrows to 23x for Alphabet versus 25x for Microsoft. Additionally, Google Cloud revenue jumped 82% to $24.77 billion in the second quarter, though Microsoft's broader revenue base and backlog give it an edge.

Microsoft's contracted revenue backlog stands at $678 billion, with Azure revenue topping $100 billion annually for the first time. The company's commercial remaining performance obligations rose 84%, and Microsoft 365 Copilot has over 30 million paid seats. Microsoft also boasts stronger cash generation and shareholder returns, with a higher dividend yield and positive free cash flow, compared to Alphabet's negative free cash flow in Q2.

Regulatory risks also favor Microsoft, as Alphabet faces potential challenges in the search market. Microsoft's main exposure is its stake in OpenAI, which does not significantly impact its backlog growth. With a higher operating margin, better interest coverage, and lower volatility, Microsoft emerges as the more durable retirement holding.