The past year has made a couple of things crystal clear. First, just because a company is big doesn't mean it can't get bigger. Second, those businesses at the cutting edge of artificial intelligence (AI) could have much further to run -- but it won't necessarily be in a straight line.
On March 4, analysts at JPMorgan reaffirmed their overweight (buy) rating on Alphabet (GOOGL 10.22%) (GOOG 9.96%) stock while maintaining a $165 price target. The company is already one of the largest in terms of market cap, yet this suggests a potential upside of roughly 24% over the coming year as of market close on Monday.
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Why is Alphabet stock down?
The past couple of weeks have shined an unkind glare on Alphabet. The company introduced image generation capabilities last month for its Gemini generative AI app. Some of the images it created were historically inaccurate, causing a backlash among users. The company quickly took the feature offline to address the issue, but not before the damage was done, sparking a sell-off that wiped $131 billion off its market value.
JPMorgan analysts believe the sell-off is overdone. While acknowledging investor frustration, which has "boiled over around the recent Gemini issues," the analysts believe the setback is temporary. They posit that not only will the company get Gemini "back on track," but suggest Alphabet will "close the generative AI gap with Microsoft."
Furthermore, the analysts suggest that Alphabet will realize additional cost savings and greater capital returns, and potentially implement a dividend, following the lead of Meta Platforms, which announced plans to initiate a dividend just last month.
A vast opportunity from AI
Despite the palpable excitement, generative AI is still in its infancy, and Google's faux pas won't be the last. These AI algorithms are only as good as their programming, and the potential for errors is clear.
That said, Alphabet is blazing new ground in AI and stumbles are to be expected. And at 23 times earnings, the stock is selling at a notable discount compared to 28 for the S&P 500.
