You could argue that no topic has consumed the business world over the past couple of years quite like artificial intelligence (AI). It has been harder to avoid than rush hour traffic in Los Angeles.
With AI predicted to make operations more efficient and cost-effective, companies (especially big tech) have been putting their wallets toward the cause, and investors have been following suit, hoping to get in relatively early on the next big thing.
For a while, it was smooth sailing and skyrocketing valuations, but this year has been rocky for many big tech and AI-focused companies. One company in particular, Alphabet (GOOG 2.25%)(GOOGL 2.01%), has had a lackluster year, down over 6% year to date through June 27.
Alphabet's falling stock price isn't ideal for current investors, but it has put the stock in bargain territory that's making it harder to ignore. When it comes to AI stocks, it's undoubtedly one of the best bargains on the market.
Image source: Getty Images.
Just how undervalued is Alphabet?
One metric many people like to look at to determine if a stock is cheap or expensive is the price-to-earnings (P/E) ratio. It tells you how much you're paying per $1 of a company's profit, with larger numbers indicating more expensive stocks.
As it stands, Alphabet is trading at 20 times earnings, which is well below its average for the past decade and also below the S&P 500's average of 28.
GOOGL PE Ratio data by YCharts
The P/E ratio is a helpful metric, but it's based on past earnings. A stock's forward P/E ratio tells you how much you're paying per $1 of projected earnings over the next 12 months.
As of June 28, Alphabet's forward P/E ratio is 18.6, still below the S&P 500's average of 21.7. This typically indicates that the market doesn't have high expectations for Alphabet in the near term -- although it should.
NASDAQ: GOOGL
Key Data Points
Alphabet is a full-stack AI company
Think about AI as being in three broad parts: research, infrastructure, and the end applications that users interact with. Alphabet is one of the few leading companies in all three.
Alphabet has been one of the most significant AI researchers over the past decade, through its DeepMind and Google Research segments. It has helped develop crucial AI models and frameworks, both of which many companies and researchers rely on today.
AI infrastructure involves the software, hardware, and platforms needed to train AI models and release them at a large scale. Alphabet has in-house chips, owns data centers, and operates its own cloud platform, Google Cloud, to power and scale its capabilities.
Aside from its own generative AI tool, Gemini, Alphabet has been integrating AI into most of its products and services. From Google Search to YouTube recommendations to Google Docs productivity to Gmail, Alphabet is banking on AI to dramatically improve the user experience across its platforms.
Alphabet is still a cash cow
The skepticism surrounding Alphabet's business typically comes from people who worry about how AI tools like ChatGPT and other forms of social media (TikTok, Instagram, etc.) will impact Alphabet's core business, Google Search.
The thought is that as more people use AI and social media to search for answers, Google Search use will decline, and the number of people clicking on Google Search ads will follow suit, hurting Alphabet's top line. Sure, that could happen, but there haven't been any signs that it has negatively impacted Alphabet's finances.
In the past four quarters, Alphabet has made nearly $360 billion in revenue. There are only nine public companies in the world that have earned more over that span. The $90.2 billion Alphabet made in the first quarter of this year was up 12% year over year.
GOOGL Revenue (Quarterly) data by YCharts
Google Search has stood tall against competition from AI chatbots and various platforms, and if it continues to do so, not investing at its current levels would seem to be a missed opportunity. The upside of Alphabet's stock far outweighs its downside.
