The potential of artificial intelligence (AI) has been thrust into the public eye of late, thanks to advances such as using AI to create art and the impressive, human-like responses from OpenAI's ChatGPT chatbot. The latter's success led Microsoft to invest billions into OpenAI.
But when Alphabet (GOOGL -1.97%) (GOOG -1.96%) introduced Bard, its competitor to ChatGPT, in February, the chatbot provided an incorrect response to a question posed in a promotional video. This contributed to a disappointing debut for Bard, and led to Alphabet stock plunging $100 billion in market value.
The reality is that Alphabet's flub with Bard isn't a "sky is falling" scenario for the tech giant's AI aspirations. An examination into the company's current AI use helps put its Bard debut into perspective, allowing investors to better gauge if Alphabet is a good investment for its AI capabilities.
How Alphabet uses AI today
Thanks to Google, Alphabet is known predominantly as a search engine and advertising company, but that belies how essential AI has become to the organization. CEO Sundar Pichai made AI a company focus six years ago. Since then, Alphabet has increasingly incorporated AI into many areas of its business.
The company has used AI in its market-leading Google search engine for the past four years. One way Google applies AI is via a language-based context to help its search engine better understand the intent of both verbal and typed search inquiries. This is an impressive feat considering factors such as slang words, and that several phrases can be used to search for the same thing.
Alphabet's success in this area is reflected in its 96% market share in mobile search, where over 60% of all U.S. searches take place. Compare that to rival Microsoft's Bing's market share of less than half a percent.
Its famed search engine isn't the only place Alphabet uses AI. Since Google advertising accounted for $224.5 billion of Alphabet's $282.8 billion in 2022 revenue, it makes sense that AI serves as a component in its ad business.
For example, Google's Smart Bidding product, which automatically manages how much advertisers pay for search ads based on business goals such as maximizing profit, employs AI to predict the advertising costs needed to achieve these goals. This allows advertisers to improve their ad spending's return on investment.
Google combines its language-based AI capabilities with Smart Bidding to better match ads to the searches conducted on its site. This combination allows advertisers to see an average 35% improvement in achieving their business goals, according to Philipp Schindler, Google's chief business officer. Google will next use AI to automatically write text-based ads for advertisers.
Alphabet's other AI usage and strengths
Alphabet's AI use extends beyond its core search engine and advertising businesses. YouTube relies on AI to effectively manage its vast content, where over 500 hours of video are uploaded every minute. Given how quickly content changes on the platform and its massive scale, YouTube relies on AI to sort through videos and compare them to each consumer's viewing history to suggest recommended videos.
The company sees other uses for its AI capabilities. CFO Ruth Porat said on the fourth-quarter earnings call that Alphabet's ambition is to use "AI and automation to improve productivity across Alphabet for operational tasks as well as the efficiency of our technical infrastructure."
While its AI capabilities are extensive, AI isn't the only reason to consider buying Alphabet shares. Its financials also make it an attractive long-term investment.
The company saw 10% year-over-year revenue growth in 2022, reaching $282.8 billion. Alphabet also generated an impressive $60 billion in free cash flow last year and exited 2022 with an equally impressive balance sheet. Total assets were $365.3 billion compared to total liabilities of $109.1 billion.
To buy or not to buy Alphabet shares
Certainly, Alphabet isn't perfect. Fourth-quarter earnings saw Google advertising revenue fall to $59 billion from $61.2 billion in 2021. The drop was due to softness in the advertising industry and foreign exchange rate headwinds that hurt Alphabet's international income, which represented about half of the company's Q4 revenue.
Consequently, Alphabet is sharpening its focus on cost reduction this year. On the earnings call, CEO Sundar Pichai stated, "We're committed to ... finding areas where we can operate more cost effectively."
Alphabet's Q4 results combined with its Bard chatbot's disappointing debut are factors keeping Alphabet stock below its 52-week high of $143.79 for Class A shares, but this creates a buy opportunity for investors with an eye toward the long term.
The softness in the advertising industry will dissipate. Forecasts predict worldwide spending on digital ads will grow from $602 billion last year to $876 billion by 2026.
Moreover, the secular trend of AI use is in its early days, so Bard's initial failure means little at this point. The global AI market is forecast to grow from $142.3 billion in 2022 to $1.8 trillion by 2030. That kind of massive market growth affords room for Alphabet to succeed in the AI war between tech titans.
Given these factors and Alphabet's deep AI integration across its products, the company is an excellent stock to own when investing in the field of AI.
