The past couple of years have been challenging for Alphabet (GOOG -0.59%) (GOOGL -0.71%) investors, but after last year's shellacking, it appears the search giant is back in investors' good graces. After losing as much as 41% of its value, Alphabet is on the road to recovery, gaining 43% so far this year.
The digital advertising industry is still struggling but will no doubt rebound as the broader economy recovers. However, Alphabet has another catalyst that will drive future growth -- artificial intelligence (AI). The rapidly changing landscape has some investors wondering what it all means for the company's future. Here are a few things the smartest investors know about Alphabet.
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1. Google's search remains dominant
Generative AI burst on the scene early this year, and Microsoft stole the headlines. The company's $13 billion investment in ChatGPT parent OpenAI was viewed as a coup, as was its decision to incorporate these latest advances in AI into its Bing search.
At the same time, many pundits suggested Alphabet had been caught flatfooted and was in danger of ceding some of its search dominance to Microsoft. This mindset was further fueled by a hasty rollout of Google's Bard chatbot, which stumbled on its debut. Many suggested that the $283 billion Alphabet generated last year was at risk of being stolen by an AI-infused Bing.
Now, just months later, a review of the data tells a different story. To close out July, Google still controls roughly 92% of the worldwide search market, nearly identical to the 92% share it held back in December, according to web analytics firm StatCounter. At the same time, Bing maintained its 3% market share, unchanged from December. The data suggests that while Bing stole headlines, Google's search market share remained intact.
The smartest investors know that Google's search dominance won't be so easily unseated.
2. Alphabet has a long history with AI
AI entered the public consciousness in a big way this year, but its history goes back decades. This isn't Alphabet's first rodeo, either. It was more than a decade ago that Google researchers pioneered a novel technique using machine learning that helped AI successfully recognize cats in video clips for the first time. This eventually led to breakthroughs in facial recognition that helped social media sites identify your friends in photos.
Back in 2016, Google's DeepMind AI was tasked with saving energy across the company's gargantuan data centers. Even after redesigning servers to be more power-efficient, their energy consumption was off the charts. To address the issue, Google engineers entered roughly 120 variables into its AI system. In a blog post, DeepMind research engineer Rich Evans and Google data center engineer Jim Gao laid out the process:
We accomplished this by taking the historical data that had already been collected by thousands of sensors within the data center -- data such as temperatures, power, pump speeds, setpoints, etc. -- and using it to train an ensemble of deep neural networks.
Then, they let the system chew on it for a bit. The result? Google achieved a 15% improvement in the power it used to run its servers and achieved a 40% reduction in the amount of electricity used to cool its data centers -- saving the company hundreds of millions of dollars in the process.
The smartest investors know that when it comes to AI, Google has been around the block a few times, and not to count the company out of the AI revolution.
3. Integrating AI into, well, everything
Investors might be surprised to know that CEO Sundar Pichai announced that Alphabet is an "AI-first" company back in 2016. While the technology has evolved in the ensuing years, the company's resolve has remained steadfast.
At Alphabet's 2023 I/O developer conference, the company announced just a few of the ways it was integrating AI across a broad cross-section of its products and services, releasing three dozen blog posts and press releases to detail its advances.
Perhaps the most important was the debut of the latest version of its Pathways Language Model (PaLM) large language model (LLM). These LLMs provide the foundation of the generative AI that has captivated the world. PaLM 2 has been "heavily trained" on more than 100 languages and can "understand, generate, and translate nuanced text -- including idioms, poems, and riddles." The system was also trained on scientific and mathematical research papers, improving its reasoning capacity and imbuing it with a greater degree of common sense.
PaLM 2 provides the backbone for many of the recent AI upgrades across dozens of Alphabet's most popular products and features. The tech can help draft email responses, pen sales pitches, write job descriptions, fill in spreadsheets, and more. It also improved Google's photo editing tools, writes code, and will be behind new and improved soon-to-launch search features.
The smartest investors know this is just the beginning and that Alphabet will develop new and intriguing ways to integrate AI into its products and service.
The fine print
The takeaway is clear: Google's long track record of AI innovation bodes well for Alphabet's future, so investors shouldn't be too quick to dismiss the company from the ongoing AI revolution.
While it isn't as dirt cheap as it was just a few months ago, Alphabet is currently selling for less than 5 times next year's sales. That's a fair price to pay for its industry-leading businesses and all the AI expertise it has to offer.
