Though artificial intelligence (AI) has been around for a while, the technology is gaining new capabilities thanks to rapid advancements. And this might still just be in the early innings of this new phase. Over the long term, leaders in AI could reap massive profits and reward their shareholders along the way.
There are several corporations whose AI work looks more than promising. One of the more attractive is Alphabet (GOOG 2.49%) (GOOGL 2.30%). Here's why buying this tech leader now could set investors up for life.
Image source: Getty Images.
A rapidly growing AI business
It wasn't that long ago that some investors thought AI would be the death of Alphabet. AI chatbots like ChatGPT would replace online search, taking away the company's most important source of revenue, or so the argument went.
But Alphabet has evolved with the times -- which, by the way, still haven't changed a whole lot. People still rely on online search for most of their queries. Google hasn't lost enough search volume in the past two years to lead to a significant drop in the company's associated advertising revenue.
Meanwhile, Alphabet added an AI overview to its famous search engine with some success, according to management. Elsewhere, AI has given a significant boost to Alphabet's cloud business.
NASDAQ: GOOGL
Key Data Points
The result is that the company continues to record strong financial results across the board. In the first quarter, revenue jumped by 12% year over year to $90.2 billion. The company's Google Cloud division posted sales of $12.3 billion, up 28% compared to the year-ago period.
Google Cloud still makes up a bit less than 14% of the company's revenue. But there could be massive white space ahead if AI -- and for that matter, cloud computing -- are still in their early innings.
Amazon CEO Andy Jassy is adamant that more than 85% of global spending on information technology is not in the cloud yet, despite the significant advantages it offers. The implications are clear: Leaders in the cloud computing industry could ride the wave of increased spending on the kinds of services they offer for a very long time.
Alphabet is among the top dogs in the industry, behind just Amazon and Microsoft. Could another company topple this trio? It's possible, but it won't be easy.
For one, Alphabet generates consistent revenue, profits, and cash flow. That grants the company the ability to reinvest enough money into its future to stay ahead of most of the competition.
Also, Google Cloud benefits from switching costs, a potent competitive edge. So the company's work in cloud computing and associated AI services provides a powerful long-term tailwind. That's an important reason it could deliver above-average market returns for a long time and set investors up for life.
Alphabet can overcome the headwinds
Alphabet's core advertising business should still produce strong results. There is hardly any search engine that seriously competes with Google, and given its network effect, investors can expect search results to improve over time. The company also has the means to stay on top of AI-related changes to people's search preferences.
It's also a leader in streaming, thanks to YouTube, and there is a vast runway for growth there as well.
So the tech company is a leader in multiple industries with significant white space, has a solid underlying business, a strong moat, and pays a regular dividend.
Now, Alphabet will encounter headwinds. The company is facing antitrust lawsuits and is at risk of losing its popular web browser, Chrome. Economic issues, perhaps stemming from President Donald Trump's trade agenda, could also affect the stock. However, while losing Chrome would be a blow to Alphabet, the company should still be able to recover.
Economic issues may arise, but they won't last forever. The business is built to thrive over the long run, which includes navigating challenges reasonably well, emerging from them intact, and still delivering strong financial results and stock returns over the long term. The bull case far outweighs the bear case for the stock, in my view. Long-term investors can safely add Alphabet to their portfolios.
