Artificial intelligence (AI) went viral last year, and the speed at which it made the rounds caught many in the tech sector off guard. To be clear, AI, in the broadest sense, has been around for decades, but the latest algorithms have really taken it to the next level. Generative AI is now being used to streamline processes and generate original content, and the resulting productivity gains are driving rapid adoption.
Veteran Wedbush tech analyst Dan Ives said the technology will spark the "fourth industrial revolution," further noting, "AI is the most transformational technology we have seen since the internet started to take shape."
While some might call it hyperbole, the view is gaining widespread acceptance throughout the tech industry. Even conservative estimates place the economic value of generative AI at $1 trillion by the end of the decade. Companies that position themselves to profit from these secular tailwinds will likely participate in the resulting windfall, with shareholders ultimately reaping the rewards.
There a plenty of AI-centric stocks to choose from, but one I'm particularly excited about is Alphabet (GOOGL 10.22%) (GOOG 9.96%).
Image source: Getty Images.
The king of the hill, in more ways than one
It's important to put Alphabet's AI opportunity in the context of its overall business, which is substantial.
The company rose to prominence on the back of its industry-leading internet search. Google long dominated the industry, currently controlling an estimated 92% of the market, according to internet statistics aggregator StatCounter. Google's algorithms have no equal in the search space and its results are widely regarded as the standard by which all other search is measured.
The company's online search acts as a funnel for Alphabet's digital advertising business. Google led the market with 30% of digital ad sales worldwide in 2022, according to data from online industry publication Digiday. While the final totals for 2023 haven't yet been tabulated, Google is unlikely to have ceded much of its market share.
The macroeconomic headwinds that weighed on digital advertising are beginning to abate, which will now play in Alphabet's favor. Indeed, the rebound is already beginning to play out. After suffering several consecutive year-over-year quarterly declines, Google's ad sales posted increases in each of the past three quarters, which suggests the recovery is gaining momentum.
Perhaps most important is Alphabet's standing in cloud infrastructure services as the third-largest cloud provider. The company continues to lag Amazon Web Services and Microsoft Azure at No. 1 and No. 2, respectively. For much of the past few years, however, Google Cloud has been the fastest-growing of the "Big Three," though it recently relinquished that title to Microsoft.
Some market watchers believe the speed at which Microsoft launched AI to its cloud customers helped the company gain share. Alphabet since rolled out its own suite of AI offerings, which boosted its growth rate to 26% year over year in the fourth quarter, up from 22% in Q3. Its growth could accelerate from here.
The start of something big
Alphabet has long been on the cutting edge of AI, having deployed its sophisticated algorithms to surface relevant search items and successfully target advertising. The company's expertise in the field provided the foundation as it recently launched its next-generation suite of AI services.
Its Vertex AI platform offers more than 100 prebuilt AI models. Google Cloud customers can use these to accelerate their own development process to build and scale AI-powered applications. Google also launched Duet AI, which has been helps users be more productive on Google Cloud. The service is deeply integrated into a broad cross-section of Google's products and services.
In early December, the company launched Google Gemini, which is billed as the company's largest AI model. The multimodal system was designed to understand information from a wide variety of sources, including text, audio, images, video, and computer code. The company published data that shows that its premier model, Ultra, "exceeds current state-of-the-art results on 30 of the 32 widely used academic benchmarks" used to assess AI performance.
As one of the world's largest cloud infrastructure providers, Google is positioned to offer AI services to its cloud customers. Needham analyst Laura Martin posits that generative AI will help vault Alphabet's market cap to $3 trillion in the coming years, representing gains of roughly 65% compared with Wednesday's closing price.
Historically cheap
Alphabet is the worldwide search and online advertising leader and a strong competitor in cloud computing. Add to that the opportunity represented by AI, and it's easy to see the vast potential ahead.
One of the most compelling reasons to buy Alphabet stock now, however, is the price. The stock is pretty cheap, selling for roughly 25 times earnings, lower than the price-to-earnings (P/E) ratio of 27 for the S&P 500 -- even though Alphabet stock has delivered more than double the gains of the broader market over the past 10 years.
Given the extent of the opportunity, I don't expect the sale on Alphabet stock to last much longer.
