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Years of relative peace came to an end this week as tech bellwethers Alphabet and Microsoft boosted their weapons reserves for the early stages of what’s shaping up to be a full-blown artificial intelligence war. “It’s a new day in search,” Microsoft CEO Satya Nadella said Tuesday during an AI event held at the company’s headquarters, saying that the “race starts today.” He later told CNBC’s Jon Fortt that AI-powered search is the biggest development for Microsoft since cloud first emerged. Both tech bellwethers held opposing AI demonstrations this week, showcasing their capabilities — and vision — to exert dominance over the latest tech craze that’s taken the industry and Wall Street by storm since the launch of ChatGPT last year . Alphabet tested its ChatGPT competitor known as Bard and revealed it to the world Monday. Microsoft on Tuesday announced new AI features for its Bing search browser . Bard’s debut comes just weeks after management said that rolling out AI chat tools too quickly could hinder the company’s reputation. CNBC previously reported the company was testing the product internally among employees. So far, Microsoft is making significant headway within AI and rising in popularity in the tech world. Data from UBS and Similarweb suggests ChatGPT surpassed more than 100 million monthly active users in January. “Google was caught flat-footed,” Evercore ISI’s Mark Mahaney told CNBC’s “TechCheck” on Wednesday . Alphabet, he added, “got beaten to market by Microsoft” despite its investments in the space. The push into AI comes as both Alphabet and Microsoft reinvent their businesses and kickstart the next phase of growth after shares of both companies plummeted during last year’s market carnage . The washout brought a long-overdue reality check to the tech sector. GOOGL MSFT YTD mountain Microsoft and Alphabet’s year-to-date performances So far, Microsoft appears to have won the first battle, and its fair to say that the software behemoth is testing Alphabet’s formidable search presence — especially after reports that Google’s Bard chatbot featured an incorrect description during a promotional video. But analysts agree that even though Microsoft fired the first shots, investors shouldn’t write off Alphabet’s long-term potential just yet. Microsoft may offer the near-term advantage and a sleeker product keeping Wall Street abuzz, but Alphabet’s years of search popularity, data and development position the company to potentially dominate the later innings of this ongoing AI game. Microsoft At least in the near term, Microsoft has the advantage. Since its launch last year, Wall Street and tech enthusiasts can’t seem to stop talking about ChatGPT. But the war isn’t over just yet, and Microsoft has a long road ahead if it hopes to one day overtake Google permanently. MSFT 5D mountain Microsoft shares are up 2% for the week UBS analyst Lloyd Walmsley said in a note this week that even a “hugely upgraded Bing has a mountain to climb to take search share from Google.” Meanwhile, Jefferies’ Brent Thill said the company needs a “crowbar to pry away” Google’s advertising dominance despite its latest AI innovations. Other analysts noted it will take time for Microsoft to bring users back to Bing. “Google doesn’t have a lot to worry about,” Thill told CNBC this week. To be sure, Microsoft is likely to take share. The company accounts for just 3% of the search advertising market today, but it’s already begun snatching up some of the market share over the last seven quarters, noted Wells Fargo’s Michael Turrin. Piper Sandler’s Brent Bracelin projects that Microsoft could increase its digital ad market share by as much as 7% at some point in 2026. While Microsoft is keeping social media and Wall Street astir, it isn’t the only technology company hopping on — and benefiting from — the trend. Investors are underestimating how other tech companies may benefit from the push toward AI — or even roll out their features — said Guggenheim’s John DiFucci. Take Advanced Micro Devices for example. CEO Lisa Su said during a recent earnings call that AI represents the largest growth opportunity, and she pointed to the company’s AI-focused chips already capitalizing on that trend. Even China’s Baidu plans to launch its own ChatGPT-style chatbot . Companies outside of technology are also positioned to benefit, with names like Stanley Black & Decke r and Caterpillar referring to machine learning and AI use cases during recent earnings calls. Alphabet Microsoft may be taking the lead on AI in the near term, but investors shouldn’t sleep on Alphabet just yet. For years, the company has been ranked the top player in search. Alphabet accounts for large swaths of digital ad dollars, with data from Statcounter suggesting it accounts for 93% of the search engine market, dwarfing Bing’s 3% market share. Alphabet’s market capitalization last stood at roughly $1.2 trillion. At this point, Google has become synonymous with online search, just like Kleenex and tissues or Band-Aid and bandages. Further, it offers both the data and the search engine that keep users coming back. “We believe GOOGL has the AI tech and scale to maintain/grow its leading user base,” said Morgan Stanley’s Brian Nowak in a Thursday note. Microsoft appears to be leading the pack in AI developments at least this year, but Alphabet isn’t slacking, with a slew of AI projects and software already under its belt. Alphabet’s Language Model for Dialogue Applications, or LaMDA, is one of those examples, and a product appearing years ahead of ChatGPT, according to Wells Fargo’s Brian Fitzgerald. GOOGL 5D mountain Alphabet shares down more than 9% for the week Beyond LaMDA, Alphabet’s AI roster includes BERT, a tool that can better understand users’ intentions when they search. Many tools also stem from the company’s DeepMind segment, a London-based AI firm it acquired for more than $500 million in 2014. Not to mention, many of Google’s products and services serve as the backbone for other AI-based products, like Wells Fargo’s virtual assistant . Evercore ISI’s Mahaney also told CNBC this week that he expects a “really interesting, really impressive product” at Google’s developer conference later this year. Baird’s Colin Sebastian said in a Wednesday note that “over the longer haul, we still think Google has competitive advantages in scale, engineering, cloud resources and AI-capabilities putting them in a good position to be a net beneficiary of Gen-AI.” Despite these strengths, Alphabet’s Bard is wading in tough water so far, with reports swirling that the chatbot shared a factual error in an advertisement posted by the company. Wedbush’s Dan Ives called the revelation an “absolute near-term gut punch to Google’s AI credibility” in a Friday note. Given the 9% slump in Alphabet’s shares this week alone, it’s safe to say investors are growing increasingly concerned about competition for the company, or perhaps they aren’t keen about the headway it’s making. By comparison, Microsoft shares are up 2% for the week as of Thursday’s close. Morgan Stanley’s Nowak said in January that rolling out competing products before they’re ready for primetime could weigh on Alphabet’s profitability . And even though Google’s market share overshadows Bing, competition will wreak havoc on its business. In a Thursday note to clients, JPMorgan’s Doug Anmuth projected that a 5% loss in Google’s search share could contribute to a 9% to 10% drop in operating income and earnings per share. “As the incumbent search leader, we think GOOGL is in a difficult spot,” he wrote. All this chaos also comes at a time when Alphabet faces a U.S. Department of Justice antitrust suit targeting its advertising business and calling for a break up. But even against this complicated backdrop, analysts say there are more battles to be fought. Bank of America’s Justin Post said in a recent note that while Microsoft won the week with a better strategy, a big reveal from Google should surface in the coming weeks. “While initially it feels like Google rushed Bard to market with the Microsoft ChatGPT deal and event overshadowing the company, this race will be a long one and we expect Google as well as Apple, Meta, and other tech stalwarts to spend billions in this AI arms race over the coming years,” said Wedbush’s Ives. — CNBC’s Michael Bloom contributed reporting
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