It looked like Alphabet (GOOG -1.96%) (GOOGL -1.97%) was going to fall behind in the artificial intelligence (AI) race thanks to the botched launch of the company's Bard chatbot earlier this year.
Alphabet's chatbot made a factual error in the promotional video during its launch event in February. It was a mistake that wiped off $100 billion of the company's market cap. However, the tech giant has made a remarkable recovery since it made a slew of AI-related announcements at the Google I/O event on May 10.
Bloomberg points out that Alphabet's market cap has jumped $115 billion since the event, thanks to a 9% increase in the company's stock price. The stock is now up 35% so far in 2023. Investors, however, are still getting a good deal on Alphabet stock, and they may want to buy it before AI supercharges the company's growth and leads to more upside.
Let's look at the reasons why it makes sense to load up on Alphabet stock right now.
Alphabet is speeding up its AI initiatives
Investors shouldn't forget that AI technology, especially generative AI, has a lot of room for growth in the long run, which is why it won't be a good idea to discount Alphabet's prospects just because it doesn't enjoy the first-mover advantage.
For instance, the global chatbot market is expected to clock 23% annual growth over the next five years. It was reportedly worth $4.7 billion in 2022. So, even though Alphabet hasn't moved as fast as Microsoft in this space, it still has a lot of time to get things in order. The good part is that Alphabet has been making improvements to its Bard AI chatbot since its launch.
The company has moved Bard to a more powerful large-language model (LLM), so it is now capable of helping users write code in more than 20 programming languages. The chatbot is now equipped with better math and logic skills, and it can now be used by Google Workspace users as well to write emails or create slideshows using text, among other features. Additionally, Bard is now available in 180 countries across the globe, and Alphabet points out that it will eventually support 40 languages.
It is also worth noting that Alphabet is looking to integrate Bard with a wide range of apps. The company pointed out in a recent blog that it is "working to connect Bard with helpful Google apps and many more partners, including Kayak, OpenTable, ZipRecruiter, Instacart, Wolfram, and Khan Academy." Alphabet is also bringing generative AI capabilities to the Google Search platform to provide better information and contextual answers to users' queries.
All this indicates that Alphabet is pulling up its socks and going all out to integrate AI into several of its products ranging from the search engine to office collaboration and productivity tools to the cloud. Given the role that AI is expected to play in these markets, Alphabet's focus on accelerating AI integration into its offerings and entering fast-growing niches such as chatbots could turn out to be a smart long-term move.
Gauging the potential long-term gains
We have already seen how fast the chatbot market could grow in the long run, so Alphabet's laser-like focus on this market could yield rich rewards. However, the company could be a bigger beneficiary of the growing adoption of AI in other verticals, such as search and the cloud.
For instance, the demand for next-generation search engines powered by AI could grow at an annual pace of 25% over the next five years. At the same time, the adoption of AI in the digital ad market could increase at an annual pace of roughly 29% through the end of the decade and hit nearly $49 billion. Alphabet is a key player in both these markets.
The company's share of the global search engine market stands at a whopping 85%. Meanwhile, Alphabet generated $224 billion in revenue from the Google Advertising segment last year, including $137 billion from the Search business. Global digital ad spending stood at $567 billion in 2022, according to eMarketer, which means that the company controls nearly 40% of the global digital ad space. Also, Google Search alone accounts for 24% of global digital ad spending.
So, the deployment of AI in these markets should help Alphabet accelerate the growth of its search and advertising business and clock faster growth. According to eMarketer, worldwide digital ad spending is expected to hit $836 billion in 2026. If Alphabet manages to hold on to its 40% share, then its advertising revenue could jump to $334 billion in four years. But if it manages to increase its share of the digital ad market with the help of its AI tools to, let's say, 50%, then its ad revenue could jump to nearly $420 billion by the end of 2026.
That would translate into a compound annual growth rate of 17% for the advertisement business, which produced 78% of Alphabet's total revenue last quarter. Meanwhile, the cloud business is another notable mover of the company's top line, as it produced just over 10% of Alphabet's revenue last quarter. This business has been growing at a nice clip, recording 28% year-over-year growth in the first quarter of 2023.
Google is the third-largest player in the cloud infrastructure service market, with a 10% market share. The business generated $26 billion in revenue last year, a 37% jump over 2021. By 2026, Forrester estimates that the cloud infrastructure services market could hit roughly $500 billion. A 10% share of the cloud market could help Alphabet generate $50 billion in revenue from this segment by 2026.
However, Google has been gradually gaining ground in cloud computing, with its market share increasing from 7% at the end of 2020 to 10% last year. So, it won't be surprising to see it generating more money out of cloud computing through further market share improvements.
All this indicates that Alphabet's total revenue could approach $500 billion by 2026 and outpace the growth that analysts are expecting from it.
GOOG Revenue Estimates for Current Fiscal Year data by YCharts.
Given that Alphabet is trading at 26 times trailing earnings right now as compared to its five-year average earnings multiple of 30, it isn't too late for investors to buy this potential AI winner as its hot stock market rally isn't over yet.
