Microsoft is the stock to buy as it leads the AI arms race while Alphabet continues to play catchup with Bard, according to Wedbush

• Microsoft is the stock to buy as it maintains its lead in the generative AI space with ChatGPT, according to Wedbush.
• While Alphabet is still playing catchup with its Bard offering, Microsoft is getting ready to monetize its headstart in AI.
• "We believe that Microsoft is in a unique position to gain share in the cloud market while deploying additional AI capabilities," Wedbush said.

The battle in generative artificial intelligence is heating up following Alphabet's I/O conference on Wednesday, during which the Google parent announced updates to its Bard platform.

But according to Wedbush analyst Dan Ives, Microsoft remains the stock to buy as it maintains its lead in AI with its stake in ChatGPT and prepares to start monetizing the opportunity.

"The AI monetization opportunity makes us more bullish on [Microsoft]," he said in a Thursday note. "We believe that Microsoft is in a unique position to gain share in the cloud market while deploying additional AI capabilities that we estimate could expand Redmond's total addressable market around cloud by 35% to 40% over the coming years."

The company's strategic stake in ChatGPT, which was bolstered earlier this year with an additional $10 billion investment into OpenAI, could set Microsoft up for the opportunity to start taking share in the cloud space from Amazon's AWS offering.

"[Microsoft] remains in an enviable position to gain share in its enterprise backyard against AWS in this cloud arms race over the next 12 to 18 months," Ives said. "We also believe Redmond is just starting to hit its next gear of growth with ChatGPT and AI also adding a new layer of growth to the Microsoft story over the coming years."

Ives reiterated his "Outperform" rating on Microsoft and said it remains a "best idea." Additionally, he increased his price target on Microsoft to $340 from $325, representing potential upside of 9% from current levels.

While Alphabet continues to play catchup in the AI space, it is setting up to go head-to-head for market share against Microsoft, especially as the search company has indicated that it plans to incorporate AI capabilities into all aspects of its product suite, including the cloud.

"With demand for AI applications accelerating across industries, we view the improvements and integrations of generative AI across Google's entire portfolio as a positive in the AI battle as it now comes down to who can gather market share as the advancements are released throughout the year," Ives said.

Despite Alphabet's budding opportunity in the AI space, he still favors Microsoft over Alphabet, with no formal recommendation or price target for Google.

"We continue to strongly believe that Microsoft's game changing early investment in ChatGPT got the key head start on the AI front in this Game of Thrones battle for big tech with Google now playing major catchup mode," Ives said.