Of all of the "Magnificent Seven" stocks, the one getting the least respect right now is Alphabet (GOOG 9.96%) (GOOGL 10.22%). Alphabet has been plagued by many publicity blunders related to its generative artificial intelligence (AI) model, but these failures likely won't last forever.
So, where will Alphabet be five years down the road?
Alphabet's AI model has some questions surrounding it
Alphabet is the parent company of Google, Android, YouTube, and more. While these seem like varied businesses, they are all heavily focused on advertising. Advertising provides 76% of Alphabet's revenue, so excelling in this area is crucial. It's also why getting its AI model right is critical.
Among the ways Alphabet uses AI is to make better choices about which ads reach which people. If its results on that front are weak, advertisers may not feel that spending with Alphabet is critical for optimal performance and look elsewhere to spend their ad dollars. This hasn't happened yet -- Alphabet's ad revenue rose 11% year over year in Q4.
Also, Alphabet's generative AI product, Gemini, made its fair share of public blunders since its launch. From AI image generation issues to its generative AI model giving incorrect answers to questions, its rollout has been far from smooth.
The most important part of any AI model is data, and Alphabet is about to get a huge boost in its data quantity and quality. Apple is reportedly considering integrating Alphabet's Gemini model into its iPhones. This partnership would give Alphabet information on an important user base, making the ad space it sells more valuable.
This kind of information could make Alphabet's AI model a force to be reckoned with in five years. But the market is treating Alphabet like it's already doomed.
Alphabet's stock is far cheaper than its peers
Unlike many of its big-tech peers, Alphabet's stock is not trading at a premium valuation. It's valued at just under 22 times earnings, which is far from what others trade at.
GOOGL PE Ratio (Forward) data by YCharts.
With Microsoft and Apple trading at 37 and 26 times earnings, respectively, Alphabet looks fairly priced compared to the others.
This sets Alphabet up for a nice run, as its future growth isn't priced into its stock. With Wall Street analysts projecting 11% growth in the next two years, the stock is set up to provide investors with market-beating returns (greater than 10% per year).
And that doesn't include the effects of stock buybacks.
Alphabet has taken advantage of its cheap valuation by repurchasing its shares. In Q4 alone, it bought back $16.2 billion in stock. This reduced its outstanding share count by over 3%, which boosted its earnings per share.
Additionally, Alphabet's operating margin ticked up thanks to disciplined spending.
All of this combines to make it a company that can grow its earnings per share by a percentage in the mid-teens range -- a much faster pace than it's growing its revenues. This sets the stock up to potentially crush the market over the next five years.
As a result, I think Alphabet is a fantastic stock to buy right now, as it is well set up for the future if it gets its AI models right. Because of Alphabet's vast engineering resources, I don't think this will be much of a problem.
