The stock market is currently fairly expensive, with the broader market, as measured by the S&P 500, trading at 23.7 times forward earnings. That means the best-performing stocks of the second half of the year will likely be undervalued today or have jaw-dropping growth to propel them to new heights.
In the AI realm, I think one company that could have a fantastic second half of the year is Alphabet (GOOG 2.74%) (GOOGL 2.73%). The market is currently bearish on Alphabet due to its dependence on the Google Search business. The assumption is that this part of Alphabet is in trouble, which is a problem because it generated 56% of Alphabet's total revenue in the first quarter.
However, I think there are a few caveats to that assessment, and Alphabet's current cheap stock price sets it up nicely as a stock that could be a massive winner in the second half of 2025.
Image source: Getty Images.
The market is fearful of Google Search losing to generative AI
Alphabet is the parent company of Google, and it also has other brands under its umbrella, including YouTube, Waymo, and the Android operating system. But the Google Search engine is the cash cow of the business and is what built Alphabet into the company that it is today.
The market is concerned that generative AI will disrupt Google Search, and there is some evidence to support this claim. Although it remains impressively high, Google Search's market share has fallen below 90% for the first time since 2015. Additionally, Apple's service chief testified in court that he believes AI will soon replace search engines.
Many people have replaced Google Search with the generative AI model of their choice, and some generative AI companies are developing web browsers to provide users with an AI-first web experience.
These are all alarming developments for Alphabet, but the reality is that they haven't yet affected its results. In Q1, Google Search's revenue rose 10% year over year. We'll get an update on Q2's results on July 23, but I'd expect more of the same strength.
The reality is that Google is how the vast majority of people use the internet. While some savvy users in tech or other fields may lean into a more generative AI-focused internet experience, this ignores the large swath of people who do not need the firepower that generative AI provides. Additionally, Google has integrated AI search summaries into its results, and these summaries likely provide enough AI to satisfy the masses.
This will play out over multiple years, but the market has already assigned Alphabet an earnings multiple that assumes it will lose this battle.
Alphabet's stock trades at a discount to the S&P 500
With the market trading for 23.7 times forward earnings, it's no secret that it has become expensive. Alphabet isn't nearly that pricey, as it trades for 19 times forward earnings.
GOOGL PE Ratio (Forward) data by YCharts
If Alphabet posts strong results to end the year, this could cause the market to change its viewpoint on Alphabet's stock and assign it an earnings multiple more akin to its big tech peers in the high 20s to low 30s. This would result in the stock rising by around 50%, which would easily enable it to be one of the top-performing stocks in the second half of the year.
We'll see if that happens, but even if it doesn't, I think the market is underestimating the power of habits ingrained within Google's user base. It could be an outperformer over several years as it proves that Google Search is here to stay.
