When it comes to stocks driven by the increased interest in all things having to do with artificial intelligence (AI), investors have gravitated to Nvidia. In a sense, this is understandable, as Nvidia’s vision brought about an early lead in the AI chip industry amid the sudden demand for generative AI capabilities.
The problem with this focus is that the AI industry extends far beyond Nvidia. That might lead one to overlook opportunities that could potentially match or even outshine that stock going forward. Given the dynamics of the AI industry, it might be time for investors to pivot to AI leaders like Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG).
AI investors should stay aware of Alphabet as it is one of the original AI stocks. The company first began utilizing AI back in 2001 when it began applying spell checks to Google searches. Its AI technology advanced from that point, and for years, most industry analysts saw it as an AI leader.
However, that changed in the spring of 2023 when OpenAI released its latest version of the generative AI chatbot ChatGPT. That company partnered with rival Microsoft and ran its servers on Nvidia chips, appearing to leave Alphabet and its companies out of the mix.
Despite the perception the Microsoft/OpenAI deal created, it is unclear whether Alphabet is “behind” in AI. The company responded quickly by launching its own updated generative AI chatbot Bard in the spring of 2023, following that up with Google Gemini in December of that year.
Moreover, it has taken a different approach to AI, leveraging its Google Research and Google DeepMind teams to emphasize the development of every layer of the AI stack. It focuses heavily on the ethics and safety issues that may come with AI. Additionally, it has developed one of the more popular AI libraries with TensorFlow, a free, open-source library for machine learning. That perspective could help Alphabet stand out as the awareness of AI’s potential grows.
Investors should also remember that the Google parent holds almost $101 billion in liquidity. This gives it tremendous resources to succeed with AI. Furthermore, in the first half of the year alone, Alphabet generated more than $30 billion in free cash flow, bringing added flexibility to help the company address any technical gaps.
Indeed, the financials show it is not as bad off as some investors might assume. In the first half of 2024, Alphabet’s revenue grew 14% yearly to $165 billion. Also, since the company held cost and expense growth to just 7%, net income rose to $47 billion during that period, a 42% yearly increase.
Also, one number in the financials highlights the importance of AI in the company’s growth trajectory — namely, the performance of Google Cloud. It accounted for $20 billion of the company’s revenue in the first two quarters of 2024 and experienced a 28% annual increase, roughly double Alphabet’s overall revenue growth rate during that time.
Moreover, while Google Cloud lags Amazon and Microsoft in that industry, its market positioning shows it plays a critical role in the cloud industry, emphasizing its need to succeed in AI.
Image source: Statista.
To that end, many investors appear to still hold faith in Alphabet stock, which is up by almost 20% over the last year. Additionally, a pullback in the stock price has left it with a P/E ratio of 24, the lowest among its “Magnificent Seven” peers. That lower valuation could lead investors back into the stock as more come to appreciate the company’s competitive position in the AI industry.
Given the company’s position and stock performance, it is likely time for investors to come back to Alphabet stock. Indeed, some of its competitors have made significant strides in AI, leaving many to wonder whether the Google parent is still a market leader in this technology.
However, the company was quick to respond with its own generative AI offerings. Also, since the cloud plays a critical role in implementing AI, Google Cloud has helped invigorate the company’s growth.
Ultimately, it is likely too early to write off Alphabet in the AI race. With a rising stock price and a low valuation among its mega-tech competitors, investors should consider following the Google parent more closely.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
