Investors and analysts are excited about Nvidia (NVDA +2.76%) these days. The leading designer of artificial intelligence (AI) accelerator chips is one of the world's most valuable stocks today. At the same time, Nvidia's stock has traded sideways since early June, and shares are available at a 17% discount from their all-time peak price. It's a recipe for successful investing, right?
But I'm not too excited about Nvidia's stock at the moment. The chip titan is a "hold" idea at best. I would much rather buy shares of fellow AI expert Alphabet (GOOG +3.44%) (GOOGL +3.51%) instead.
Here's why the Google parent looks like a stellar investment in September 2024. It's a tempting story in three parts.
Image source: Getty Images.
Chapter 1: Alphabet was built to last
Remember when the Google company changed its name to Alphabet? That was a genius move by recently recruited CFO Ruth Porat. The Alphabet-branded umbrella organization gave the company free rein to try radically different business ideas without confusing users and investors.
Is Google's online search and advertising expertise a natural fit for medical research, self-driving taxis, or energy grid management? Maybe not, but it makes sense for one of Google's sister operations to pursue these goals under the Alphabet name. And they all have access to Google's computing expertise, global data center network, and advanced research projects.
Nine years later, Porat has moved on to the dual roles of president and chief investment officer, explicitly managing the non-Google pieces of the Alphabet empire. The company structure she created will help Alphabet roll with the punches and thrive in the long run. If I could only own one stock forever, it would be this flexible tech titan.
Chapter 2: Google has been an AI expert for decades already
Alphabet is also in prime position to benefit from the AI boom. This company was developing AI-powered features and services long before Nvidia and ChatGPT started a generative AI market boom. Have you tried any of these Google products, all built on a shared AI foundation?
- Google Search: It takes AI brains to find an information needle in the online haystack, preferably in less than two seconds per search.
- Google Ads: The ad-buying system relies on deep learning analytics and Google's personalized ad placement makes use of several types of AI.
- Google Voice: This old system, known as GrandCentral until Google bought the company in 2007, has been training Alphabet's voice recognition systems from the start. Android's voice-based controls and dictation hit the ground running thanks to this robust corpus of training data.
- Gmail: The leading email platform lets you send quick replies to incoming emails with an AI-driven button. This function is powered by the Google Gemini large language model (LLM) these days, and by that system's not-so-powerful precursors before that.
I'm not even talking about the stand-alone Gemini LLM yet, nor about Google Cloud's prospects in the market for cloud-based AI systems. Alphabet is one of the first names popping into my head in the AI space, and the AI influence ranges from the very foundation of Google Search to futuristic experiments I haven't even heard of yet.
ChatGPT started this booming AI market. Alphabet plays a leading role in its development.
NASDAQ: GOOGL
Key Data Points
Chapter 3: Alphabet's stock is very affordable
Despite Alphabet's tight connection to the surging AI sector, its stock isn't skyrocketing. Nvidia's share price is up by a head-spinning 766% over the last two years. Microsoft (MSFT +2.42%) gained 78% over the same period, chiefly thanks to its involvement with OpenAI and ChatGPT. But Alphabet only gained 58%, not even keeping pace with the tech-heavy Nasdaq Composite (^IXIC +1.63%) index and its 65% two-year increase.
As a result, Alphabet's stock trades at modest valuation ratios. Shares are changing hands at 23 times earnings and 6 times sales, which would be reasonable for a mature, low-growth industrialist or retail chain. But Alphabet's sales are soaring with a compound average growth rate (CAGR) of 18% over the past five years. In that light, its valuation ratios look downright stingy.
Epilogue: Three big advantages add up to one great investment
So Alphabet offers a terrific trio of investable qualities: Long-term stability, deep ties to the ongoing AI market surge, and affordable share prices. I can barely contain myself from grabbing a few more Alphabet shares under these favorable circumstances, and you should look into doing the same.
