Internet conglomerate Alphabet (GOOGL 0.31%) (GOOG 0.33%) has ruled Wall Street as a force of nature for two decades. But the sudden rise of artificial intelligence (AI) and chatbots like ChatGPT put Alphabet on its toes, an unfamiliar position for the company and investors alike.
The stock trades roughly 30% off its high as the market ponders the company's outlook after years of search engine dominance, with Google having put billions into its coffers. Alphabet isn't sitting still; instead, it's developing its own AI chatbot, Google Bard, which could integrate into Google to compete with a newly revamped Microsoft (MSFT -1.00%) Bing.
The stakes are high, and Google's massive 93% global search market share is up for grabs. Is Alphabet still a smart long-term investment? Here is what you need to know.
Is Microsoft turning up the heat on Google?
Google has been so dominant in search for so long that it's hard to call any other search engine a competitor. However, fellow tech giant Microsoft renewed efforts by relaunching its Bing search engine with ChatGPT capabilities, thanks to a partnership with ChatGPT's creator OpenAI. Bing only recently relaunched, but Microsoft did boast about its progress in its fiscal year 2023 Q3 earnings call.
Microsoft CEO Satya Nadella disclosed that Bing has more than 100 million daily active users and that Bing's mobile app saw a four-fold boost in install growth since its launch. Nadella also noted that Bing grew its market share, though it didn't disclose specifics. That's potentially misleading, considering the business segment that houses Bing grew revenue by just 10% year over year and is coming from a tiny number compared to Google.
Meanwhile, Alphabet reported its Q1 earnings, and Google's revenue grew by 2% year over year. It's probably far too early to draw any meaningful conclusions from this data. Will Bing's hype last? Will the addition of Google Bard squash Bing's momentum? Until some hard market share data comes to light, investors can steer clear of the panic button.
Alphabet has its own AI opportunities
Let's not assume that just because Microsoft is tied up with OpenAI, Alphabet isn't developing its own opportunities with AI. Alphabet CEO Sundar Pichai outlined three AI focus points the company's working toward, including language learning models (Bard), AI tools for creators and developers, and commercializing its AI technology for other enterprises.
Like Microsoft, Alphabet can leverage its cloud platform in these applications, and Google Cloud did show solid growth in Q1, boosting revenue by 28% year over year. How should investors look at this? Artificial intelligence is a massive market opportunity that some estimate could be worth as much as $14 trillion by 2030. As large as companies like Alphabet and Microsoft are, there is plenty of room for multiple winners if AI is legitimately such a game-changer.
Alphabet has massive distribution to consumers via Google, YouTube, and Google's G Suite products, which have millions of monthly active users. With a quality product and some execution, Alphabet could carve a competitive spot in these growing AI opportunities.
A leap of faith in Alphabet doesn't cost as much
The market's uncertainty around Alphabet has steadily made the stock cheaper for long-term investors. The company trades at a price-to-earnings ratio (P/E) of 23, and the company's recently announced $70 billion share repurchase program will only support future earnings growth. Analysts forecast Alphabet's earnings-per-share (EPS) could grow by 14% on average over the next three to five years.
GOOGL PE Ratio data by YCharts
Meanwhile, Alphabet continues to have one of Wall Street's best balance sheets, with $115 billion in cash and equivalents and just over $13 billion in long-term debt. The combination of mid-teen earnings growth, massive repurchases, and a reasonable valuation gives investors a relatively strong shot at double-digit investment returns moving forward.
Making smart long-term investments doesn't mean you have to outsmart yourself. Alphabet seems like an easy base hit, and getting on base consistently is how you create long-term results in the market.
