Bloomberg Intelligence believes generative AI could soar to become a $1.3 trillion market by 2032 as more companies invest in their technical capabilities. So far, Nvidia has been one of the biggest beneficiaries of the hype, with its stock price up by almost 200% in 2023 alone. But for value-conscious investors, the tech giant Alphabet (GOOG 1.75%) (GOOGL 1.68%) may be an even better long-term bet. Let's explore some reasons why.
How is Alphabet tackling the AI opportunity?
The launch of OpenAI's generative AI chatbot, ChatGPT, initially raised concerns that Alphabet's Google Search could see its economic moat erode. But instead of buckling under the pressure, the company adapted by incorporating generative AI into many aspects of its business. This year, Alphabet launched its Bard chatbot, which is essentially a ChatGPT copycat. And more importantly, it incorporated AI into Google Search.
Right now, when most users type search queries on Google, they receive optional AI-generated answers in addition to the regular search results. This feature could outcompete ChatGPT because it takes advantage of Google's immense market share (the website handles over 90% of all search queries) to drive adoption. Google's search engine also uses up-to-date information, unlike ChatGPT, which trained on data up to 2022.
The monetization potential of these consumer-facing AI efforts remains unclear, but the company could use the data it generates for targeted advertisements and other forms of consumer research.
Tackling the software and hardware opportunities
Alphabet is not limiting its AI efforts to the consumer-facing side of the market. The company also has lofty ambitions in the enterprise niche. And this has a lot to do with the company's dominant position in the Silicon Valley ecosystem. According to management, over half of venture-backed generative AI start-ups use Google's cloud-computing platform, meaning the company can benefit tremendously from growth in the sector.
Alphabet is not the only company tackling this side of the market. It faces competition from rivals like Amazon's AWS and Microsoft's Azure. However, the relative popularity of Google's platform is a convincing vote of confidence in its cloud-based offerings and the technology behind them, such as its proprietary tensor processing units (TPUs) designed to scale cost-efficiently for a wide range of workloads.
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Alphabet also benefits from tech-industry networking, with over a third of AI unicorns (start-ups valued at over $1 billion) led by former Google employees who may be more familiar with its services and personnel.
Google Cloud turned profitable for the first time this year and is helping lead company growth, with revenue soaring 28% to $8 billion in the second quarter. The segment generated an operating income of $395 million, up from a loss of $590 million in the prior-year period. The expansion in AI-related demand could help support its continued success.
Alphabet is still an excellent value
Like many previous technology-hype cycles, the AI opportunity is getting expensive for investors, with industry leaders like Nvidia and Amazon trading for around 40 times forward earnings. Alphabet bucks the trend with a significantly lower bottom-line valuation of just 19, making it an excellent alternative for value-conscious investors.
While the tech giant is still overreliant on digital advertising (which represented over 80% of second-quarter revenue), its efforts in consumer and enterprise-facing AI could offer much-needed diversification and growth.
