As most investors know, some stocks in artificial intelligence (AI) have stood out for their outsized gains. The recent returns on stocks like Nvidia and Palantir are a testament to the transformative power of that technology.
But those successes do not mean every AI stock sells at a premium. In fact, investors might be surprised to learn that many of these stocks do not command premium valuations, and that lack of buying has made the opportunity particularly compelling in one stock.
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The company and its challenges
Perhaps one of the more surprising AI value plays is Google parent Alphabet (GOOGL 0.36%) (GOOG 0.40%). Alphabet has applied AI in its applications since 2001, and before the rise of ChatGPT, investors typically considered Alphabet a top AI stock.
Today, perceptions are much different. It now sells at a P/E ratio of about 19. That makes it the cheapest stock in the "Magnificent Seven," and many investors would now consider it a value stock.
The uncertainty now surrounding Alphabet makes the low valuation understandable in some respects. OpenAI's ChatGPT seemed to take Alphabet by surprise. Although it responded by launching Google Gemini soon after, Alphabet appears to lag ChatGPT competitively.
ChatGPT also presents a problem for Google Search. ChatGPT directed users to desired websites based on keywords, and Alphabet derived revenue from this process by selling advertising.
Unfortunately for Alphabet, generative AI platforms like ChatGPT merely return information often compiled from multiple sites. While some users may still visit the sites from which AI platforms source material, many users never go to the sites, which reduces the ability to sell ads and presumably undermines long-established business models.
Consequently, Google Search's market share is now below 90% for the first time in years, according to Oberlo. With 74% of Alphabet's revenue still coming from advertising in the first quarter of 2025, that trend could bode poorly for the company over time.
NASDAQ: GOOGL
Key Data Points
The remaining case for Alphabet stock
Nonetheless, other attributes of the company should lead investors to question whether the company is oversold at the aforementioned 19 P/E ratio.
The AI giant has worked for years to reduce its dependence on advertising. In the year-ago quarter, advertising accounted for 77% of overall revenue, and that percentage dropped over the last year even though ad revenue grew by 8% during that time.
The most prominent non-advertising enterprise under its umbrella is Google Cloud, which now makes up almost 14% of the company's revenue. Moreover, Alphabet owns numerous businesses not discussed in its quarterly report, including Verily Life Sciences, Google DeepMind, and Fitbit.
Still, one Alphabet-owned enterprise showing particular promise is the autonomous driving company Waymo. A recent funding round valued Waymo at $45 billion, indicating its potential to be a major revenue driver under Alphabet's umbrella.
Alphabet has also invested heavily in itself. In 2025, it pledged to spend $75 billion in capital expenditures (capex). To finance that cost, it has $95 billion in liquidity. It also generated $75 billion in free cash flow over the previous 12 months, a figure that does not include capex. That ability to generate cash makes it possible to invest heavily in itself, likely improving its AI technology and making it competitive in other tech-related fields.
Alphabet as a value play
Considering Alphabet's low P/E ratio and tremendous resources, investors should likely be adding shares at current levels.
The rise of ChatGPT does put pressure on its ad business and may force Alphabet to diversify its revenue sources more quickly than it had planned. But Alphabet is investing tremendous amounts of money back into its business. That investment could improve its AI capabilities, and investors should not yet count it out in this industry.
Its ability to fund itself should also make investors optimistic about Alphabet's future. If the company improves its AI and successfully develops new revenue sources like Waymo, investors may find themselves feeling glad they bought Alphabet while it was still a value stock.
