Alphabet (GOOGL 0.15%) (GOOG 0.28%) doesn't get nearly enough credit for its leadership position in artificial intelligence (AI). The stock trades at a forward price-to-earnings (P/E) ratio of less than 19 times analysts' 2026 earnings estimates, making it one of the cheapest megacap AI stocks out there. For a company with dominant positions in search, mobile, and video, along with rapidly growing cloud computing and robotaxi businesses, that valuation looks far too low.
Search, AI, and Alphabet's distribution advantage
One of the reasons why Alphabet's stock is so cheap is that investors have worries that AI will disrupt its Google Search business. So far, that hasn't happened. In fact, search revenue growth accelerated in the second quarter, climbing 12% year over year to $54.2 billion. Rather than people using Google less often, the addition of new AI features has actually helped drive more search queries.
Image source: Getty Images.
Currently, more than 2 billion people use AI Overviews inside Google Search, while its newly launched AI Mode is quickly gaining traction. AI Mode sits as an AI chatbot alongside Google search, so users can quickly toggle between an AI chatbot, search, news, images, etc., all in one place. In an Oppenheimer survey, 82% of users found it more useful than traditional search, and more than 60% said it was more helpful than OpenAI's ChatGPT. After a successful rollout in the U.S. and India, AI Mode is now being launched globally.
One of Alphabet's advantages is that it doesn't need to change consumer habits. Billions of people already use Google every day, and by integrating AI into existing products, Alphabet is simply enhancing the user experience. That's a far easier task than trying to lure users away to a new platform.
Alphabet's biggest advantage, though, is distribution. Chrome controls two-thirds of the global browser market, while Android powers over 70% of smartphones. Google is also the default search engine on Apple's Safari browser through a revenue-sharing deal. This makes Google the entry point to the internet for billions of people.
It's also sometimes easy to forget that Alphabet has spent decades building one of the most powerful ad networks on the planet, which is capable of serving everything from powerful global brands to local stores down the block. With users and advertisers both in tow, this is a difficult moat for competitors to cross.
NASDAQ: GOOGL
Key Data Points
Cloud computing and TPUs
While search remains Alphabet's cash cow, Google Cloud has become a major growth driver. Revenue surged 32% in Q2 to $13.6 billion, while operating income more than doubled to $2.8 billion. The business has hit scale and is showing strong operating leverage.
Customers are adopting Google's Gemini models, Vertex AI platform, and BigQuery analytics tools at a rapid pace. Developers are also turning to Google's custom tensor processing units (TPUs), which are optimized for AI workloads. These chips give Google Cloud a cost advantage, both by reducing its own infrastructure costs and by being able to offer a more efficient and cost-effective solution to its customers.
TPUs are particularly important as AI inference grows, with most experts believing it will ultimately become a much bigger market than training. Right now, all cloud computing companies are seeing tremendous growth due to high demand, but if Google Cloud's TPUs can give it a cost-per-inference advantage, that would give it an edge when the market's growth eventually slows from its current breakneck pace.
The company acknowledged that demand is running so hot that capacity constraints could last into 2026. That's actually a bullish signal. Alphabet is investing heavily in new data centers to meet demand, which should only expand Google Cloud's profitability over time.
Emerging bets give Alphabet an advantage
In addition to search and cloud computing, Alphabet also has a collection of emerging businesses with huge long-term potential. Waymo, its robotaxi unit, is leading the autonomous driving race in the U.S. The service is now available in multiple cities, and it's testing the service in 10 new markets, including New York and Philadelphia.
The company is also making advancements in quantum computing. Its Willow chip has made progress on error reduction, which has been a major hurdle for the technology. While quantum computing is still years away from commercialization, it could become another massive growth driver for the company in the future.
Alphabet is a dirt-cheap AI stock
Alphabet has a strong collection of market-leading and emerging businesses. Yet despite this, it trades at one of the lowest valuations among big tech AI leaders.
Investors still worry about disruption to search, but the data tells a different story. AI is currently leading to more search queries, not less, and the company has big network effect advantages due to its distribution and ad platform. Meanwhile, its cloud computing business is taking off, and Waymo has the potential to be a game-changer.
For investors looking for a way to gain exposure to AI and other emerging technologies, Alphabet is one of the cheapest ways to do it.
