When it comes to which "Magnificent Seven" stock is the best to buy, I think the answer is clear: Alphabet (GOOGL +0.66%) (GOOG +0.44%).
While there is some concern that artificial intelligence (AI) will disrupt its core search business, I don't see it playing out the way many fear. If anything, the market is missing just how much potential upside Alphabet still has. This includes the areas of search and AI infrastructure, as well as in new verticals like autonomous driving and quantum computing.
Image source: Getty Images.
A plethora of opportunities ahead
One investor concern is that AI chatbots will replace search. It's easy to see why some investors worry, but AI queries are significantly more expensive to run than traditional searches. That's why products like ChatGPT have paid tiers and query limits. Alphabet's ad-supported search model, meanwhile, still dominates, and not just because it's unlimited and free. Alphabet owns the distribution. Its Android smartphone operating system and Chrome browser are both market share leaders, while it has a revenue-sharing agreement with Apple to be the exclusive default search engine for its devices. It even has revenue-sharing arrangements with smaller third-party browsers like Opera. That's a moat that no chatbot is going to unseat overnight.
Alphabet's ad network edge should also not be overlooked. The company has spent decades building one of the largest and most effective digital advertising platforms in the world. Meanwhile, its self-serve ad tools are easy to use, making it simple for businesses of all sizes to run effective campaigns. Local businesses can create listings for free and promote them with just a few clicks, while large enterprises can run complex campaigns.
And when it comes to monetization, Alphabet is just getting started. Only about 20% of its searches today have ads, but that could change in the future. Meanwhile, with its new AI-powered search experience, Alphabet is rolling out commerce-related features like "Shop by AI," virtual try-ons, and dynamic ticket searches across platforms. These tools don't just improve the user experience; they create new monetization opportunities.
At the end of the day, search and AI chatbots are likely to be complementary. AI chatbots are great for many tasks, but they often fulfill different needs than traditional search, and the monetization model for AI chatbots is still evolving. There is a very good chance they won't be completely free and that many users will stick with free, ad-based search. Also not to be overlooked is that with its new AI mode, Google lets users toggle between AI and search without having to leave an app, which is a nice feature.
On the infrastructure side, Google Cloud is hitting its stride. The cloud computing business has now reached scale and is showing strong operating leverage. Last quarter, the segment saw revenue growth of 28%, while operating income surged 142%.
Google Cloud is benefiting from customers using its Vertex AI platform to build, deploy, and manage their AI models all in one place. At the same time, they can use Alphabet's leading Gemini foundational model as a jumping-off point to develop their own models and tools. Google Cloud has a strong leadership position in both data analytics, with tools like BigQuery and Kubernetes, which are software packages that bundle apps with everything they need to run.
Not to be overlooked are Alphabet's custom-built Tensor Processing Units (TPUs). These custom AI chips have been designed specifically to optimize AI workloads within Google Cloud's TensorFlow framework. As such, these chips can be both more powerful and energy-efficient than off-the-shelf graphics processing units (GPUs). That means lower costs not just for customers but for Google Cloud, as well.
Alphabet even rents out its TPUs through Google Cloud, and it was reported that OpenAI -- one of Nvidia's biggest customers -- has been testing its TPUs. While OpenAI isn't ready to deploy TPUs at scale just yet, the fact that it's even testing Alphabet's chips says a lot about its competitiveness.
Moving forward, Alphabet will have an opportunity in the AI chip space to take some market share, especially in inference, which is less technically demanding than AI model training. The company just launched Ironwood, a TPU designed specifically for inference, and the inference market is eventually expected to become much larger than the AI training market. As such, even modest gains in inference workloads would directly translate into higher cloud usage and better margins for Alphabet.
NASDAQ: GOOGL
Key Data Points
And it doesn't stop there. Alphabet is also building a lead in autonomous driving. Waymo, Alphabet's robotaxi subsidiary, is seeing usage skyrocket, and it's expanding into new cities. It's also recently partnered with Uber for fleet services and distribution. In Austin, Waymo vehicles were more active than 99% of Uber's human drivers, showing its strong potential as it scales across the country. Waymo isn't profitable yet, but the first-mover advantage is real, and if this market scales as expected, the upside is massive.
Alphabet is also a leader in quantum computing with its Willow chip. One of the biggest issues with quantum computing is that it is error-prone, but Willow has shown that it can exponentially reduce errors as it scales up. This is a big breakthrough in one of the most promising emerging fields of technology, and while usage is likely many years away, it is another example of Alphabet's technology prowess.
A cheap stock
Despite all of this, Alphabet trades at a forward price-to-earnings (P/E) ratio of just over 18 times 2025 analyst estimates. That's a huge disconnect for a company with leading positions in search, video (YouTube), mobile (Android), cloud computing, AI infrastructure, autonomous vehicles, and quantum computing. It's the cheapest AI play among the "Magnificent Seven" and arguably the one with the most room to run.
While the market worries about disruption, Alphabet is executing on multiple fronts and planting seeds in massive future markets. With its unmatched distribution in search, an expanding cloud platform, powerful TPUs, and growing bets in areas like autonomous driving and quantum computing, this is a stock that looks undervalued.
For long-term investors looking for a cheap technology leader, Alphabet is the clear pick from the "Magnificent Seven."
