Last year was a challenging one for Alphabet (GOOGL 0.72%) (GOOG 0.82%) and its investors. The downturn sent the stock plunging to a multiyear low, ultimately shedding 41% of its value. What a difference a year makes, as the Google parent is up 50% so far this year as of this writing and just 12% off its peak.
As a result of the economic uncertainty that remains, marketers are reluctant to ramp up spending, weighing on the digital advertising that makes up the bulk of Alphabet's revenue. Despite those challenges, investors are focused on the opportunity presented by recent advances in artificial intelligence (AI) and what it means for the future. Here are three things the smartest investors know about Alphabet.
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1. Google's search is still the cream of the crop
Microsoft made waves earlier this year with a $13 billion investment in OpenAI, the creator of ChatGPT. The company believed that the subsequent integration of generative AI technology into Bing search would help the company wrest away some of Google's search dominance.
That strategy thus far has fallen far short of its objective. As of October, Google retained roughly 92% of the worldwide search market, virtually unchanged from its 91% share in December, according to Web analytics firm StatCounter. At the same time, Bing's market share is also virtually unchanged at 3.1%. This suggests that while generative AI-enhanced search is a novel approach, the vast majority of users are still doing it the old-fashioned way -- they Google it.
2. AI is in Alphabet's DNA
There's little question that AI went viral in 2023, but the technology certainly isn't new. Alphabet has been using these advanced algorithms for years to improve its search results. But that's just the tip of the iceberg.
Google's DeepMind has long been at the forefront of AI technology. Its AlphaFold system revolutionized the processing of amino acid sequences of proteins. Likewise, its AlphaGo system was the first to master the ancient Chinese game of Go, among the most complicated games ever devised. Played on a 19-by-19 grid with 361 squares, Go is so complex that the number of possible moves exceeds the number of atoms in the universe.
However, DeepMind's advances weren't all fun and games. In 2016, the segment came up with a novel way to save money on Alphabet's massive data centers. Researchers loaded 120 variables into a specially designed deep learning neural network, designed to mimic the function of the human brain. After running endless scenarios, the system was able to achieve a 15% improvement in power consumption and a 40% reduction in the amount of electricity necessary to cool the data centers. This advancement alone saved the company hundreds of millions of dollars -- more than the estimated $525 million Alphabet spent to acquire DeepMind in 2014.
Let's not forget the years of AI development Google has invested in improving its search algorithms and perfecting its digital advertising. Given the company's rich history of deploying AI, it isn't a stretch to say that AI is in Alphabet's DNA.
3. AI first
It shouldn't be surprising to investors that CEO Sundar Pichai has dubbed Alphabet an "AI-first" company -- but they might be surprised to learn that this pronouncement was made back in late 2016.
More recently, Alphabet has been unwilling to sit by and let Microsoft steal its thunder. Earlier this year, in conjunction with Alphabet's 2023 I/O developer conference, the company left no doubt as to its intentions. Alphabet dropped 36 press releases and blog posts detailing its advances in AI, with the intention of "making AI more helpful for everyone."
Perhaps the most lucrative addition was Duet AI for Google Cloud, a set of tools designed to help users of all skill levels build software applications. Duet offers data engineers and application developers AI-driven coding assistance, not only making recommendations along the way but also finding errors and suggesting corrections.
The smartest investors know that when it comes to AI, this is just the beginning, particularly based on Alphabet's long and storied history of profiting from the technology.
The long view
It wasn't too long ago that pundits suggested that Alphabet was caught flat-footed by advancements in generative AI and would somehow be left behind. The company has since clearly shown that it isn't resting on its laurels and has the background and resources to remain a contender in the AI revolution.
Its rising stock price has caused a commensurate increase in its valuation, but Alphabet is still selling for less than 5 times next year's sales. That's a compelling price for the world's search leader, digital advertising kingpin, a cloud infrastructure competitor, and a clear contender in the race for AI.
