Until the Google I/O event held on May 10, investor sentiment toward Alphabet (GOOG 0.37%) (GOOGL 0.35%) about its prospects in artificial intelligence (AI) was generally negative, with many thinking the company was falling behind. This sentiment came quickly after OpenAI released ChatGPT to the public on Nov. 30, 2022, and the news media began publishing articles on how ChatGPT would eventually destroy Google Search. Since then, investors had remained lukewarm toward Alphabet.
But after Alphabet's AI-themed Google I/O developer conference, investor sentiment toward the company turned positive, and Alphabet once again became the cool kid on the block. So what did CEO Sundar Pichai and the rest of the company's management say about AI during the conference that reignited investor interest? Is it sufficient enough to warrant buying the stock?
Let's take a closer look.
ChatGPT vs. Bard
OpenAI powered its original ChatGPT with a large language model (LLM) named GPT-3.5. In response, Google introduced Bard, powered by its LLM, named Lamda, in March 2023.
LLMs are advanced AI systems trained on text data to understand relationships between words and phrases, making them useful for generating text, translating languages, and answering complex questions. You can think of LLMs as the engines powering a chatbot.
Unfortunately for Google and OpenAI, Lamda and GPT-3.5 were flawed and gave too many wrong answers in many areas. For instance, the coding website Stack Overflow temporarily banned ChatGPT for giving too many wrong answers to questions.
And Alphabet's stock dropped 9% on Feb. 8 after Reuters pointed out that Bard gave an incorrect answer in a promotional video. So it was apparent both companies needed significant upgrades to their AI engines.
In March, OpenAI released an upgrade called GPT-4, which is available for use in its paid chatbot version, ChatGPT Plus. Alphabet responded with an upgraded LLM, PaLM 2, at the recent Google I/O this May.
So the big question is: Which LLM is better, PaLM 2 or GPT-4? Only time will tell. Still, PaLM 2 has two advantages that could help it gain significant market share against GPT-4.
The first is that PaLM 2 is open-source and free for developers. At the same time, OpenAI makes developers bide their time on a waiting list to gain the opportunity to build applications and services on GPT-4. Over the long term, being open-source and free gives PaLM 2 the potential to become more widely adopted than GPT-4.
The second advantage for PaLM 2 is its availability in four sizes: Gecko, Otter, Bison, and Unicorn, with Gecko being the smallest and Unicorn being the largest, allowing users to choose the size that best suits their needs. For example, Gecko is so tiny that it can work on offline mobile devices, a usage that GPT-4 likely can't fill.
Alphabet reestablishes itself as a top AI company
Although some might think Alphabet needs to catch up in AI, the company has been leading since it declared itself an AI-first company in 2016. Management ensured that its annual developer conference, Google I/O, reminded investors of that.
It spent most of the latest Google I/O discussing how it was adding PaLM 2 to over 25 new products and features. These include a Google Cloud security product named Vertex AI Workbench powered by a specialized LLM named Sec-PaLM, a medical answering service that answers medical questions called med-PaLM, and an AI assistant product named Duet infused into multiple Google products.
The company says Duet AI can serve as a writing aid in Gmail and Google Docs, create original images from text, analyze data in Google Sheets, create backgrounds for videos in Google Meet, and more. Duet AI rivals many of the functions found in Microsoft 365 Copilot.
Last but not least, the company recently infused PaLM 2 into its Google Search, which rivals Microsoft's introduction of GPT-4 into its search product Bing.
Investors seemed to like what Pichai was cooking because, after Google I/O, its stock began outperforming AI rival Microsoft (MSFT -1.84%) year to date, as seen in the chart below.
Although Alphabet might still hold the crown as the king of AI, there is one risk that investors might want to consider.
Is Bard ready for prime time?
AI-powered chatbots developed by companies like Alphabet and Microsoft have great potential to transform industries and improve our lives. But many people are concerned about their potential for malicious uses, such as purposefully spreading false information or creating manipulated videos and images that appear authentic, called "deep fakes."
Another concern is that these chatbots can give incorrect answers to questions -- a massive problem if the use case is medical information. In addition, the technology could generate offensive or harmful text, and violate copyrights.
If Bard or any other Alphabet product containing PaLM 2 causes harm, it could damage the company's reputation for cutting-edge technology, and the stock would likely tank.
Is AI a reason to invest in Alphabet?
The potential for AI to transform every industry is enormous, and with Alphabet being one of the most prominent players in AI research and development, it's well positioned to benefit from this transformation. Moreover, with the increasing use of AI, expect Alphabet to expand its business and profits further.
If you are looking for a top-dog AI stock, now is an excellent opportunity to purchase a few shares.
