Artificial intelligence (AI) is getting a lot of attention this current earnings season. The race is on among America's largest technology companies to see who can most effectively implement the technology.
Google parent Alphabet (GOOGL 10.22%) (GOOG 9.96%) started 2023 seemingly on the back foot, as its key competitor Microsoft (MSFT 1.82%) capitalized on its stake in the current hot AI company, ChatGPT creator OpenAI. Since then, Google engineers have been racing to compete. The uncertainty regarding its efforts has weighed on Alphabet's stock price, which remains down 28% from its all-time high.
What investors need to note here is that search engines are only one application for AI technology, and Alphabet is finding AI success in other areas too, including cloud computing. It's part of why investors might want to take this opportunity to buy Alphabet stock on the dip.
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Search slows, and all attention turns to AI
According to Cathie Wood's Ark Investment Management, generative artificial intelligence (AI software that can create content like text, images, videos, and even computer code) is set to create $90 trillion in enterprise value for software companies by 2030. Its impact will be so significant that the firm expects it will also contribute $200 trillion in output to the global economy.
Alphabet appears to be losing the early battle to Microsoft, which integrated the ChatGPT chatbot with its Bing search engine, and it claims to have increased its share of search in the U.S. in the recent quarter. However, Google is still the dominant player in search -- it owns 93% of the market worldwide -- and it's focused on using that leadership position to deliver its own AI to internet users.
Google's search revenue growth slowed to a crawl in the first quarter, increasing by just 1% as advertisers pulled back on their spending in this tough economic climate. That didn't slow the company's progress on AI. It powers Google's Smart Bidding tool, which more accurately prices ads based on how the user interacts with them. Plus, it launched its Automatically Created Assets beta, which is designed to generate text for businesses to help optimize their ads. It keeps creatives fresh and relevant for the end user, resulting in more clicks.
Then there's Bard, Google's direct competitor to ChatGPT. It's still in live beta mode, but the company continues to improve its capabilities. Bard can now help users with programming tasks, including code generation, to speed up application development.
YouTube stumbles, but Google Cloud shines
YouTube is a key asset for Alphabet, and it recently focused on the transition to Shorts, its short-form video content format designed to compete with ByteDance's TikTok and Meta Platforms' Instagram and Facebook Reels.
The streaming platform's revenue fell by 2.5% in Q1 compared to the same period last year, and Shorts was part of the reason. It's seeing significant user growth, and the number of YouTube channels uploading Shorts content daily grew by 80% last year. However, that's stealing "time spent" away from longer-form YouTube videos, which tend to monetize at a higher rate -- though the company says this gap is closing. The sluggish economic climate was also to blame, as advertisers pulled back on their spending.
Google Cloud, on the other hand, had a strong Q1. Its revenue was up 28% year over year, and Alphabet spoke about the platform's longer-term progress. Over the last three years, annual deal volume surged 500%, and deals valued at $250 million and up have grown 300%. Moreover, 60% of the world's 1,000 largest companies are now Google Cloud customers.
Its Q1 revenue growth rate was faster than the 27% growth delivered by Microsoft Azure, which is a key competitor. It suggests Google Cloud is taking market share, and its initiatives in artificial intelligence might be one reason. As more companies around the world adopt cloud technology to run their businesses online, AI will form a greater part of their strategies thanks to its ability to automate tasks and accelerate workloads.
Alphabet says its cloud customers use AI for everything from text-to-image generation to training self-driving vehicles. Plus, in a new partnership with Google Maps, Mercedes-Benz will be able to customize its navigation interfaces, and Google will deliver AI cloud capabilities to help advance the automaker's autonomous driving technology.
Alphabet stock is a great value at the current price
Amid the tough economic environment, technology companies like Alphabet experienced slowing growth, which affected their earnings power. As a result, they restructured their costs, and in 2022, the overall sector laid off 164,500 employees. It followed that up with a further 183,800 layoffs this year already, and Alphabet alone was responsible for 12,000 of them. The company also reduced the size of its office space to save money.
That should allow more of Alphabet's revenue to flow to the bottom line (as profit), a positive for investors. Plus, the company just authorized a mammoth-sized share buyback of $70 billion, which will help to keep its stock price buoyant.
Over the last four quarters, Alphabet generated $4.49 in earnings per share. Based on its current stock price of $106.80, it trades at a price-to-earnings (P/E) ratio of just 23.7, which is an 11% discount to the broader tech sector, represented by the 26.7 P/E ratio of the Nasdaq-100 index.
This might be a great opportunity to buy Alphabet stock while it's still down 28% from its all-time high, especially ahead of the coming AI revolution. The new technology will weave its way through all parts of Alphabet's business, and if the company can fend off the challenge from Microsoft, AI could reignite Google Search revenue over the long term.
