Despite increased market volatility surrounding tariff announcements, investors shouldn't forget about a major technological innovation that's happening. I'm talking about artificial intelligence (AI), which is still a very important trend to pay attention to.
As of the market close on April 9, there's one top AI stock that's trading at a price-to-earnings (P/E) ratio of 19. That's the stock's cheapest level in a little over two years.
If you're looking for AI exposure, you should probably consider taking a closer look at this trillion-dollar business. But there's also a key risk to keep in mind. Considering all the important factors, is it time to buy?
NASDAQ: GOOGL
Key Data Points
Navigating AI's impact
It seems new AI advancements are announced every week. But there's growing confidence among executives and investors that this new technology will have a huge impact on the economy over time.
One company that many feared would be negatively affected is Alphabet (GOOGL +1.71%) (GOOG +1.99%). It generated 56% of its overall revenue in the fourth quarter from Google Search, its crown-jewel segment that makes the business a leader in digital advertising. This risk that all of these generative AI models pose is that they'll pressure ad revenue over the long term, as people won't use Google Search as much to find the answers they're looking for.
Maybe it's time to give Alphabet the benefit of the doubt. It launched AI Overviews last May. And monetization here is similar to that for regular searches, according to chief business officer Philipp Schindler.
To be clear, though, it's impossible to say how things will shake out over the next five to 10 years. Google Search has 90% market share globally, so it certainly has a lot to lose. But management is confident, as CFO Anat Ashkenazi said on the Q4 2024 earnings call.
"We're pleased with the momentum we're seeing in AI innovation and monetization. We've been using AI to improve the performance of our Ads business for well over a decade, and Cloud is generating billions in annual revenue from AI infrastructure and generative AI solutions."
It's worth pointing out that Google Search registered $198 billion in sales in 2024. That number was up 13% year over year.
Hard not to come away impressed
The rise of AI platforms, and their impact on the digital ad market and user behavior, is something investors shouldn't ignore. Perhaps we should be giving Alphabet the credit it deserves. It's positioning itself to take advantage of the AI boom.
Moreover, AI is already an important part of the company's various offerings. "We have seven products and platforms with over 2 billion users, and all are using Gemini," CEO Sundar Pichai said on the latest earnings call. Gemini is Alphabet's suite of AI-powered models.
Alphabet is certainly in a position of financial strength to go after the AI opportunity aggressively. It plans to spend $75 billion in 2025 on capital expenditures to bolster its technological capabilities. That massive cash outlay is only possible because the business is so profitable and has such a strong balance sheet. And while it's unclear how the U.S.-China tariff war will affect Alphabet's spending plans, the company is in a strong financial position, with a cash horde of more than $23 billion available to help it manage any storms.
The company also has a wide economic moat that supports its competitive position. Google Search, for example, benefits from a network effect. As more searches happen, the algorithm improves, and this leads to better results over time. Greater search activity then drives more advertising interest.
YouTube also has a network effect. More content that's uploaded brings on more viewers, which then incentivizes the creation of more content.
With Alphabet stock trading at a P/E ratio of 19, its lowest level since the end of February 2023, I think investors should consider buying right now.
