The world's most popular search engine, Google, was founded in 1998. And as the platform continued to become more dominant, the company invested aggressively in new areas of the technology industry to fuel growth.
To better reflect the increasingly diverse nature of the business, it established a parent organization called Alphabet (GOOGL -2.03%) (GOOG -1.94%) in 2015, which is now home to Google Search and all of its other businesses, including Google Cloud and YouTube. Together, they have amassed a $1.7 trillion market capitalization, making Alphabet the third-largest company in the U.S.
But this year, the entire organization has shifted its attention to a new opportunity: artificial intelligence (AI). Alphabet is weaving the technology into its product portfolio, and it has the potential to significantly improve the company's growth in the long term. Here's why investors might want to buy Alphabet stock today, or risk feeling regret when they look back a few years from now.
Investing in AI is about defense as much as offense
Alphabet stock took a hit in early 2023, as tech rival Microsoft (NASDAQ: MSFT) began to aggressively expand its artificial intelligence footprint. That company made a $10 billion investment in ChatGPT developer OpenAI in January, and it immediately integrated the chatbot into its Bing search engine. Investors feared Microsoft had created something that could finally cut into the 92% market share held by Google Search.
Today, it's evident those concerns were mostly overblown, but that's not to say there aren't risks ahead. Chatbots are a more efficient way for consumers to find the information they need, because they can simply enter a prompt and receive a direct answer to their queries. Traditional search engines require the user to sift through several web pages to find the information they seek, which is a less convenient experience.
To Alphabet's credit, it leaned on years of experience in building AI models behind the scenes to release its own chatbot called Bard. But it also went a step further by introducing AI-generated responses to its traditional Google Search platform.
Now, when you type a query into Google, there is often a text-based response at the very top of the page that saves you having to click through to different web pages. This change is really important because Google Search remains Alphabet's largest source of revenue, so it needs to keep traffic flowing to entice advertisers to spend money.
In August, Alphabet also unveiled a new enterprise product called Duet AI. It's similar to Microsoft's Copilot feature that it introduced into its 365 document suite, and it will allow businesses to leverage the power of generative AI to create content.
Duet AI will be integrated with Google Workspace (Gmail, Google Docs, Google Sheets, and Google Slides) and has the potential to substantially boost productivity by helping workers generate text for reporting purposes, or visual content for presentations. Duet AI will also be available with Google Cloud to help programmers write code.
Before the enterprise versions of these chatbots from Alphabet and Microsoft, businesses were concerned that their sensitive data would be used by the two companies to further train AI models. Duet AI -- which is available for $30 per user, per month -- does not harvest data, which makes it much safer in commercial settings.
Google Cloud could be Alphabet's biggest AI opportunity
Google is also battling Microsoft -- and Amazon, for that matter -- in the cloud industry. Google Cloud is the smallest of the three major providers of cloud services, but it's rapidly expanding its suite of AI tools.
AI models are typically developed, trained, and deployed through enormous centralized data centers, which run on graphics chips designed by Nvidia. Google Cloud operates infrastructure just like that, but it has also built its own hardware. Its tensor processing units (TPUs) are designed to perform large matrix operations, which can rapidly accelerate the development of machine-learning models.
While competitors like Amazon and Microsoft are also working on their own chips, Google says its TPU and Nvidia products together give customers the widest choice of AI supercomputer options. That's why over 70% of generative AI unicorns (AI start-ups worth $1 billion or more) are Google Cloud customers. Since those businesses could scale up to become the greatest value creators in the AI industry, having them on board could supercharge Google Cloud's revenue in the long run.
Google Cloud offers more than 80 AI models for its customers to build upon, and between April and June alone, it saw a 15-fold increase in the number of businesses adopting them. They include global banks, retailers, and many other types of companies.
In the recent second quarter (ended June 30), Google Cloud generated $8 billion in revenue, a 28% year-over-year increase. That was slightly faster than the 26% growth delivered by Microsoft Azure, and far better than the 12% delivered by Amazon Web Services. That implies Google is gaining cloud market share.
Image source: Getty Images.
AI could send Alphabet stock surging over the long term
As mentioned at the top, Alphabet is the third-largest company in the U.S.; only Apple and Microsoft have higher valuations. But there is an argument to be made for Alphabet stock to trade higher based on its price-to-earnings (P/E) ratio alone relative to those two companies.
Alphabet trades at a P/E of 29 as of this writing, which is below Apple's P/E of 30 and Microsoft's P/E of nearly 35. Plus, Alphabet is also cheaper than the Nasdaq-100 index, which trades at a P/E of 30.
That discount is perplexing because the projections surrounding the financial impact of AI are staggering, even at the low end. Research firm McKinsey believes the technology will add $13 trillion to global economic output by 2030, with 70% of businesses using it worldwide -- and they'll likely need platforms like Google Cloud to do so.
Ark Investment Management, which is run by tech investor Cathie Wood, is even more bullish. It thinks AI could add $200 trillion to the global economy by 2030, and it says AI software could generate $14 trillion in revenue by then.
Alphabet is focused on capturing as much of that value as possible, and its stock price should benefit along the way. That's why when investors look back on this moment a few years from now, they'll probably wish they had bought the stock while it's trading at a discount to its peers in the tech sector.
