The artificial intelligence (AI) revolution seems very much like the real deal and not just one of the hype-fueled bubbles that occurred during past hot technology trends. That's why AI chip leader Nvidia has soared 219% this year -- the best performance of any Magnificent Seven stock by a wide margin.
Going into the new year, which is the best AI stock to scoop up for the long term right now? It might actually be the biggest 2023 Magnificent Seven laggard, which just released a new AI product that could propel it to new heights in 2024 and beyond.
NASDAQ: GOOG
Key Data Points
Alphabet is the cheapest of the Magnificent Seven
Alphabet (GOOG 2.25%) (GOOGL 2.01%) has outperformed the general market in 2023, up 49.3%. However, even that strong performance actually makes it the worst performing Magnificent Seven stock this year!
GOOG Year to Date Total Returns (Daily) data by YCharts.
Of course, all of these stocks are coming off the technology bear market of 2022, so most of them are still well off their all-time highs. For Alphabet's part, it's down about 14.5% from its late-2021 highs.
Not only has Alphabet underperformed its large-cap tech peers this year, but it's actually the cheapest as well. On a price-per-earnings (P/E) basis, Alphabet trades at just 25 times earnings, the lowest P/E of the group. But Alphabet is even cheaper than it looks, as it has $120 billion in net cash, good for about 7.5% of its market cap. In addition, Alphabet also continues to lose billions every year in its experimental "other bets" segment of moonshot-technology bets, which detracted $3.2 billion from Alphabet's operating income through the first three quarters of this year -- good for about a 5% reduction to profits.
GOOG PE Ratio data by YCharts.
Why is Alphabet so cheap? Well, many have anticipated that its dependence on digital advertising means growth will eventually slow. In addition, some have feared that generative AI may pose a threat to the core Google search business and that Microsoft's (MSFT 1.84%) exclusivity arrangement with current-generation AI leader OpenAI will leave Google Cloud in the dust.
However, neither assumption seems likely to be correct. Despite its massive size, Google Search revenue grew 11.3%, and its dominant streaming platform YouTube surged an impressive 12.5% in what is still a soft-ish economic environment.
In terms of AI and cloud prowess, those worries also look overdone, especially with Wednesday's release of Gemini, Alphabet's new large language model.
Image source: Getty Images.
Gemini unleashed
On Wednesday, Dec. 6, Alphabet released its new large language model for generative AI called Gemini. Gemini will be Google's answer to ChatGPT 4.0 and promises to bring unprecedented AI capabilities to the market.
Earlier this year, Google merged its Google Brain and DeepMind units into Google DeepMind, a newly integrated AI unit tasked to take on OpenAI's ChatGPT. The result is Gemini, a massive multimodal model which can reason seamlessly across text, audio, images, video, and computer code. In addition, Google said Gemini is the first model to outperform human experts on MMLU (Massive Multitask Language Understanding), a popular testing method for new AI models. In that framework, Gemini got a 90% accuracy rating, above the 89.8% accuracy of human experts and the 86.4% accuracy of ChatGPT-4.0. Overall, CEO Sundar Pichai wrote that Gemini outperforms current best-in-class models on 30 of 32 overall industry benchmarks.
The new Gemini model will also come in three different sizes: Ultra, Pro, and Nano. Ultra is what it sounds like: the highest powered, most advanced model for the most complex workloads and also the most expensive. Pro will likely be the bread-and-butter model used by most enterprises to scale across a wide range of tasks. And Nano is a slimmed-down version of Gemini that can be run on edge devices, such as an AI PC.
Alphabet announced it would be adding parts of Gemini to its virtual chatbot Bard on December 13, with the complete, new, advanced version added early next year.
Look for Google to compete with Microsoft in chatbots and the cloud
After its October earnings report, investors sold Alphabet when its cloud growth came in lighter than Microsoft's even though Microsoft's cloud is larger. But with the release of Gemini and the ongoing melodrama at OpenAI over CEO Sam Altman's abrupt firing and rehiring, Google certainly has an opportunity to steal away cloud customers for new AI applications.
Perhaps more importantly, if Gemini enhances Alphabet's core search business even close to what ChatGPT has done with Microsoft's Bing, it would be a boon for its ability to protect its core cash-cow search business. Some had thought ChatGPT would enable Bing to strip away Google's market share this year, but Google has pretty much maintained its dominant share of global search and delivered double-digit revenue growth. So with the incorporation of Gemini, that moat looks protected.
Given Alphabet's cheap valuation and relative underperformance this year, the release of Gemini could pave the way for the Google parent to flip the tables on rivals in 2024 and beyond.
