Why Alphabet Stock Is a No-Brainer Buy After This Week's Sell-off

Things seemed to be looking up for Alphabet (GOOG 1.05%) (GOOGL 1.11%) before this week. After a dismal 2022, the tech-giant's shares were up close to 19% year to date as of the market close on Feb. 4. Concerns about the threat from OpenAI's ChatGPT weren't enough to hold Alphabet stock back. Slowing advertising sales growth wasn't, either.

But Alphabet lost a lot of that momentum this week. Its shares plunged nearly 8% on Wednesday and continued to tumble further on Thursday.

Some investors could think it's time to throw in the towel. My view is exactly the opposite. Here's why Alphabet stock is a no-brainer buy after this week's sell-off.

Why the stock fell

There's one popular explanation for why Alphabet stock has fallen this week. The company conducted an artificial intelligence (AI) event on Wednesday to promote the launch of its new chatbot called Bard. During the presentation, Bard provided some incorrect information. Headlines soon trumpeted that Bard's wrong answer was the culprit behind Alphabet losing $100 billion of its market cap.

What was this costly AI error? Bard was asked about NASA's James Webb Space Telescope. While most of its answer was fine, the chatbot replied incorrectly that the telescope took the first pictures of a planet outside of our solar system. 

However, there's also a different take on the cause of the stock's downturn. Microsoft (MSFT 1.63%) held its own AI event on Tuesday. The competing theory is that investors sold Alphabet shares because the company's AI presentation didn't compare well with Microsoft's. 

Microsoft plans to integrate its Bing search engine with an OpenAI-developed chatbot that the company says is more powerful than ChatGPT. Alphabet has similar plans. The company said that it will soon make Bard available with Google Search.

Irrational moves

Warren Buffett's mentor Benjamin Graham wrote in his classic book, The Intelligent Investor, about an often irrational investor named Mr. Market. This allegorical character sometimes makes level-headed decisions. However, he frequently goes off the deep end. And when he does, it creates opportunities for other investors. We're seeing Mr. Market in action this week with Alphabet.

Don't believe me? Consider this: That inaccurate response from Bard about the NASA telescope during Alphabet's AI presentation wasn't news. On Monday -- two days before the company's AI event -- the exact same question and wrong response was included in an online message from Alphabet CEO Sundar Pichai. The stock rose the next day.

Should Alphabet's team have prevented this public relations blunder? Absolutely. Did it make the company suddenly worth $100 billion less? Absolutely not.

I think it's more understandable if some investors felt less confident about Alphabet's AI strategy because of its presentation. Maybe some were expecting much more grandiose plans. Again, though, my view is that there's still an element of irrationality here.

To sell Alphabet stock because the company's announced plans weren't ambitious enough makes two huge mistakes. First, it assumes that Alphabet is revealing all of its plans, and the company would be foolish to do so. Second, it assumes that those plans won't change.

You can rest assured that they will. So will Microsoft's. 

A no-brainer buy

I'm not concerned about Bard's slip-up. Anyone who has used ChatGPT knows that conversational AI isn't perfect yet. But it's really early. I fully expect that the technology will improve dramatically and do so quickly. That's the beauty of neural networks: They learn from their mistakes.

What about the threat to Alphabet from Microsoft and Open AI? Again, I'm not worried.

Don't underestimate the challenge that Microsoft faces. It will have to be significantly better than what Alphabet offers to convince people to switch from Google to Bing. And with the initial launch of the new AI-powered Bing limited to Microsoft's Edge browser, the climb is even steeper.

I firmly believe that Alphabet stock is a no-brainer buy with this week's sell-off. Many investors are acting irrationally. Their moves present a great buying opportunity for everyone else who sees the bigger picture. 

That bigger picture, by the way, is a really attractive one for AI stocks, in general. Alphabet is in my portfolio, as is Microsoft. Both of these stocks will likely generate tremendous returns over the next decade and beyond, thanks to AI.