Although 2023 has marked the rise of many artificial intelligence (AI) stocks, 2024 will be an even bigger year. 2023 was filled with product announcements, but we haven't come close to seeing what these innovations can do. It will also expose many AI-related investments propped up on a lot of hype. Those are stocks to avoid.
However, one stock that I'm confident will have a strong 2024 (and perhaps the best of all companies) is Alphabet (GOOG 0.92%) (GOOGL 0.93%). It is just starting to hit its stride in the AI space, and its primary business is also starting to turn around after a weak 2022 and 2023.
Alphabet has multiple strong products
Alphabet is the parent company of many well-known brands like Google, YouTube, and the Android operating system. While CEO Sundar Pichai has long declared Alphabet an AI-first company, its primary revenue stream is advertising.
In the third quarter, 78% of revenue came from advertising. Advertising wasn't at its peak over the past few years, as many businesses were preparing for a recession and dialed back spending. But for the first time in several quarters, Alphabet's advertising wing had a solid quarter, growing revenue by 9%. This bodes well for 2024, as advertising still steers Alphabet.
In addition to advertising is Alphabet's Google Cloud, its cloud computing wing. Cloud computing is also set up to have a strong 2024, as the computing capability combined with data storage that cloud computing provides will become critical as companies roll out their in-house AI solutions.
Mentioning AI, Alphabet's Gemini was recently released and is the first model to surpass human experts in the massive multitask language understanding test, a popular way to measure an AI model's effectiveness. With its best-in-class performance (it beat OpenAI's GPT-4 model in many head-to-head competitions), Gemini should be a huge revenue boost for Alphabet as it's adopted.
Heading into 2024, Alphabet is well positioned to succeed. But just how much performance can Alphabet shareholders expect?
The stock may be undervalued
Another component in my prediction that Alphabet will have a great year is rooted in its current valuation. Over the past decade, Alphabet's price-to-earnings (P/E) ratio was about 30. This isn't out of line with what other big tech stocks trade at, as Apple and Microsoft each trade at around 30 times earnings or greater.
GOOGL PE Ratio data by YCharts
However, Alphabet doesn't have that same premium, as it only trades for 25.5 times earnings, which is about the same as the S&P 500's 24.6 times earnings. Essentially, the market values Alphabet like it's an average business, which is a huge mistake considering the potential upside.
If you value Alphabet using 2024 earnings, it looks even cheaper at 20 times earnings.
In 2024, if Alphabet delivers the earnings that analysts project and the stock reaches its average historical valuation of 30 times earnings, that would represent a 50% upside in the stock. But even if it remains at its current 25.5 times earnings valuation, Alphabet's stock will gain about 28% if it hits projections.
However, the tailwinds blowing in Alphabet's favor are just starting, and they will last beyond 2024. So, even though Alphabet is slated to have a strong 2024, I'm still excited to be a long-term shareholder.
While other AI stocks may have greater upside than Alphabet, few have the almost guaranteed positive return promise that Alphabet can provide shareholders in 2024. As a result, it's my top AI stock pick for 2024.
