Finding underrated artificial intelligence (AI) stocks isn't an easy task. There's a ton of hype and expectations built into this investment trend, and finding one that's underrated is easier said than done. However, I think there's an underrated AI stock that everyone knows about that's ripe for strong gains over the next few years: Alphabet (GOOG 2.58%) (GOOGL 2.64%).
While Alphabet may have stumbled out of the gate in the generative AI arms race, it's now near the top of the leaderboard. Alphabet also has other businesses that are doing quite well, giving the stock even more upside.
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Google Search is still growing despite rising competition
Alphabet is the parent company of many businesses, including Google, YouTube, the Android operating system, and Waymo. While this may sound like a wide reach, a lot of money comes from advertising, specifically from the Google search engine.
There is a fear in the investing community that Google search will be replaced by generative AI, which would be disruptive to Google. However, Google isn't just going silently into the night. It already integrated AI search overviews, which provide a generative AI summary at the top of each result. This feature has become quite popular and is likely enough to bridge the gap between a full AI experience and a traditional search.
NASDAQ: GOOGL
Key Data Points
In Q2, Google Search's revenue rose 12% year over year, which is an acceleration from Q1's 10% growth. That's not a sign of a struggling business unit, so investors should likely be less bearish on Google Search.
Alphabet also has another segment that's thriving in the AI arms race: Google Cloud.
Cloud computing is a growing industry
Google Cloud has been one of Alphabet's fastest-growing divisions over the past few years. Cloud computing is seeing two major tailwinds driving its growth: a general move to the cloud for business workloads and AI workloads. Google Cloud had a phenomenal Q2, with revenue rising 32% year over year and its operating margin improving from 11.3% last year to 20.7% this year.
The cloud computing industry is expected to continue growing rapidly for the foreseeable future, with Grand View Research forecasting the market to grow from $752 billion in 2024 to $2.39 trillion by 2030. That's a huge expansion, and Google Cloud's third-place position in the industry will allow it to continue grabbing market share.
Alphabet is clearly doing quite well, but what makes it underrated?
Alphabet's stock is quite cheap compared to the S&P 500
Despite Alphabet's success, it still trades at a discount to the broader market, as measured by the S&P 500. Alphabet is trading for 20.2 times forward earnings compared to the S&P 500's 23.7.
GOOGL PE Ratio (Forward) data by YCharts
Because of its hefty discount to the market, investors likely expect Alphabet to underperform the market. However, Alphabet has continuously displayed strong growth over the past few years, and the fears many investors had regarding its base business are being disproven each quarter.
The reality is that Alphabet is a strong contender in the AI arms race and has a leading generative AI model in Gemini. With other strong businesses under Alphabet's umbrella, it makes for a strong company that's built to weather any economic situation. I think it's an excellent buy at these levels, and won't be surprised to see it be one of the top-performing stocks over the next five years.
