Alphabet (GOOGL.O) and Microsoft (MSFT.O) are about to release their financial reports. Despite Alphabet's strong performance this year, Microsoft, the owner of Windows, appears to be the stronger investment choice ahead of the earnings announcement.

Alphabet is scheduled to report earnings on October 29, followed closely by Microsoft on October 30. As two large market cap tech stocks that lost momentum in the early-year rally this summer, Wall Street will closely watch the financial reports from these two companies.

This year, Alphabet's stock price has risen by 17% to $162.93, while Microsoft has increased by 11% to $416.72. Both stocks have retraced from the highs set in July - Alphabet at $191.18 and Microsoft at $467.56.

If concerns about Alphabet persist, Microsoft may be a safer bet in the short term.

Capital expenditures, regulatory pressure, and the trend of investment shifting from large cap tech stocks to small cap companies are all major reasons for the significant pullback in Alphabet's stock price.

In July, Alphabet reported that second-quarter capital expenditures rose to $13.2 billion, up from $12 billion in March. Google faces pressure to join the race in generative AI. Competition from other AI search engines poses a risk of losing market share for Google, which has led the search industry for many years. In addition, in August, a judge ruled that Google maintained a monopoly in general search services and generic text advertising. The U.S. Department of Justice suggested splitting the company to address this issue.

In a research report on October 9, Itaú BBA analyst Thiago Kapulskis wrote that the remedies proposed by the Department of Justice "exacerbate our bearish view on Google, as we believe the search market may face structural changes, which is one of Alphabet's key profit drivers."

"If there is a new competitor, we believe that Google's financial condition may be significantly impacted," Kapulskis wrote. He rates Alphabet as "hold" with a target price of $200, while he rates Microsoft as "outperform large cap" with a target price of $460.

Google did not immediately respond to a request for comment.

Investors will closely watch for any information on regulatory risks, including artificial intelligence investments, during Alphabet's earnings conference call. If the earnings guidance does not significantly exceed expectations, the stock price could fall. However, positive comments on artificial intelligence projects and future search could be bullish factors.

Meanwhile, Microsoft is also heavily investing in artificial intelligence, with its own projects and investments in ChatGPT owner OpenAI. While some on Wall Street question when Microsoft will see returns on these investments, others are focused on the company's growth, especially in the Azure cloud computing business.

Bank of America Securities analyst Brad Sills has a "buy" rating on Microsoft with a target price of $510. In his research report on Thursday, he wrote that he believes Azure's growth will accelerate in the second half of the year, which will act as a positive "catalyst" to drive the stock price up. Sills does not cover Alphabet, but another Bank of America Securities analyst has a "buy" rating on Alphabet with a target price of $206.

According to FactSet data, out of 58 surveyed analysts, 53 rate Microsoft as "buy", 4 as "hold", and 1 as "sell". Among 68 analysts surveyed by FactSet, 54 rate Alphabet as "buy", 14 as "hold", with no analysts rating it as "sell".

The valuation of Alphabet seems to reflect some risks. Currently, the stock has a P/E ratio of 19.5 times the expected earnings for the next 12 months, lower than its five-year average of 23 times. Whereas Microsoft's P/E ratio is 30.1 times, higher than its average of 29.3 times.

Investing in any stock before earnings release carries risks. Currently, it appears that Alphabet carries higher risks.