Title: Betting Against This AI Stock? A Warning: It’s Poised to Soar
Artificial intelligence (AI) is undoubtedly transforming various industries, and investment opportunities continue to arise. One AI stock, in particular, has caught the attention of investors around the globe. Despite recent concerns and an initial lag in performance, Alphabet, the parent company of Google, is shaping up to be a force to be reckoned with in the world of AI.
OpenAI’s introduction of ChatGPT appeared to catch Alphabet off guard, allowing Microsoft to invest billions in integrating the large language model (LLM) chatbot into its Bing search engine. Many believed this move could pose a genuine threat to Google Search’s stronghold, as several attempts by other companies to challenge its dominance have failed in the past.
However, recent data suggests that the buzz surrounding ChatGPT is already waning. In June, the platform experienced a 10% decline in month-over-month traffic, with users spending less time on the site. Additionally, iPhone downloads have plummeted by a staggering 38%. Meanwhile, according to Statista’s latest report, Google Search continues to gain ground, holding 85.5% of the desktop market compared to Bing’s 8.2%. This highlights the challenge Alphabet faces in dethroning Google’s dominance.
While Alphabet’s stock has lagged behind its peers, sentiment is not necessarily an accurate reflection of the company’s potential. Many analysts have downgraded the stock due to perceived threats posed by AI. However, Alphabet has been at the forefront of AI development for years, boasting some of the brightest minds in the industry. The company recently consolidated its AI teams into one entity known as Google DeepMind and unveiled its next-generation LLM, PaLM2. This advanced language model promises higher-level reasoning, coding capabilities, language generation, and its applications extend far beyond just a chatbot. With products like Bard, Google Docs, and cybersecurity applications in the pipeline, Alphabet is proving itself to be a formidable player in the AI race.
It is only a matter of time before the market recognizes Alphabet’s AI leadership, potentially causing a sentiment shift. It is crucial not to overlook the strength of its underlying business. Alphabet’s cash flow from operations has been staggering, with $91 billion generated in each of the past two years and an additional $24 billion in the first quarter alone. This speaks volumes about the company’s financial stability.
CEO Sundar Pichai is also diligently working to improve the company’s efficiency and agility, aiming for a 20% increase in overall efficiency. In the first quarter, Alphabet took $2.6 billion in downsizing-related charges, showcasing its commitment to streamlining operations. Furthermore, despite a challenging economic environment, the Google Cloud segment recorded its first-ever operating profit and achieved a 28% year-over-year sales growth. This segment’s revenue doubled from $13 billion in 2020 to over $26 billion in 2022.
In terms of valuations, Alphabet’s price-to-earnings (P/E) ratio and multiple cash-flow ratios trail behind both Microsoft and its historical averages, as illustrated in the accompanying chart. This suggests that the stock may be undervalued, presenting an attractive opportunity for investors.
Alphabet also rewards its shareholders through a lucrative share buyback program. By utilizing its robust cash flow, the company has repurchased $155 billion in stock since 2020, which amounts to nearly 10% of the current market cap. As advertising dollars return and earnings ramp up, shareholders stand to benefit even more.
While stocks like Nvidia and Microsoft are the talk of Wall Street and Main Street, the key to successful investing lies in skating to where the puck is going, rather than where it currently is. Alphabet’s extensive AI initiatives, dominant position in search, impressive cash flow, and thriving cloud segment all point towards a bright future. As the market unravels the company’s true potential, investors may witness Alphabet’s stock soar to new heights.
