Alphabet (GOOG 1.27%) (GOOGL 1.23%) has been one of the most fascinating megacap growth stocks this year. In June, it was badly underperforming the S&P 500 and many of its peers. But the stock has rallied nearly 50% since that point, and is up over 18% in the last month -- closing in on $3 trillion in market cap.
Alphabet's rally showcases the power of changes in investor sentiment. The investment thesis didn't change; rather, the perception of Alphabet's role in the age of artificial intelligence (AI) shifted from negative to positive.
Here's why Alphabet's bold push into AI is somewhat similar to what Walt Disney (DIS -0.98%) is doing in the entertainment industry, and what that means for investors interested in either stock.
Image source: Getty Images.
Out with the old, in with the new
One of the hardest adjustments a company must make is realizing that a former cash cow simply isn't what it used to be. Businesses evolve and industries change. Companies that pivot can use their financial muscle to make inroads in new markets; others that are slow to adjust may see their seemingly impenetrable moats vanish.
Walt Disney's history is riddled with change. The company began as an innovator -- releasing the first feature-length animated film, Snow White, in 1937. It was a huge gamble, but it paid off. Other risks included opening Disneyland in 1955 and Walt Disney World in 1971; providing DVDs for home entertainment in the late 1990s; and acquiring Pixar in 2006, Marvel Entertainment in 2009, and Lucasfilm in 2012. Those gambles paid off.
But Disney's last decade hasn't gone as well -- the stock is up just 11% over the past decade, compared to a 236% return for the S&P 500. Its acquisition of Twenty-First Century Fox in 2019 was costly and leveraged its balance sheet. Then came the pandemic in 2020, which disrupted the parks and movie business.
The company released Disney+ in 2019, which got off to a great start but took a while to become profitable. Today, Disney+ is performing much better, but Disney's traditional cable business (linear networks) is suffering major declines. However, the parks business is booming, and so is Disney's growing cruise fleet.
The history of Disney is chock-full of moments where it realized it couldn't rely on what was working and focused instead on what would work in the future. The company is cannibalizing its linear networks business because it realizes that streaming is here to stay.
That's even more true lately with its launch of an ESPN streaming app, which will unlock revenue but also further erode its cable business. Disney is investing heavily in what's working, such as doubling its earlier forecast for its experiences segment to $60 billion in capital expenditures over the next decade.
So while Disney isn't a pure-play, high-margin cash-cow streaming giant like Netflix, it's far more innovative and diversified than other traditional media companies such as Comcast. In this vein, Disney shares many similarities with Alphabet.
Alphabet has become a leader in AI
In an age when technology changes quickly, it's amazing to look back at the resiliency of Google Search, which has held a virtual monopoly on internet search for at least the last 15 years. Now, generative AI tools such as ChatGPT and Microsoft Copilot are transforming the way people search for and interact with information.
Alphabet has a lot of moving parts, from Google Search to YouTube, Google Cloud, Google One, Android, Google Pixel, Google Play, and "other bets" like Waymo and Google Fiber. But despite the diversification, there's no denying that the company still depends heavily on Google Search -- this segment provided a staggering 56% of revenue in Alphabet's latest quarter. It's like how Disney used to heavily depend on blockbuster animated and live-action films before its parks business and linear networks took off.
Alphabet isn't looking at generative AI as a passing fad, it's embracing it. Gemini, powered by the research lab Google DeepMind, has become one of the most advanced multimodal generative AI models. That means it can process text, audio, images, video, and code. Google has embedded Gemini into its regular search function, offering "AI Overviews" for Google Search, which provide a summarized answer to a query rather than requiring the user to rely on webpage-based answers.
The Gemini app takes it a step further by allowing users to engage with information in a completely different way; it includes a basic free version (Gemini 2.0 Flash), more advanced versions, and even AI tools for businesses. Adoption of the app is surging, and there are even reports that Gemini could power the next version of Apple's Siri.
Gemini may be Alphabet's most innovative breakthrough in years, but it remains to be seen whether Alphabet can monetize it as effectively as Google Search, which relies heavily on ads. Google could offer native ads for Gemini in the future, which could be a clever way to use an existing business model for a new platform. But unlike Google Search, which is free, Gemini has far better pathways toward subscription revenue from users and enterprises.
There's a similar transition for Disney in the streaming space. Disney realizes that having its complete library of intellectual property available for a low monthly fee is cannibalizing its at-home entertainment and linear networks. But building a powerhouse streaming segment is the right long-term move, even if it takes time to pay off.
Two balanced buys for long-term investors
Disney and Alphabet are legacy companies that are both doing a good job of embracing change rather than resisting it. That's a quality that investors seeking a balance of growth and value are likely to appreciate.
Alphabet isn't as cheap as it used to be, but it's still the least expensive of the "Ten Titans" stocks. Despite a major slowdown in many consumer discretionary companies, Disney has held up well and is growing earnings; the stock is a great value at under 20 times forward earnings.
All told, Disney and Alphabet stand out as balanced buys for long-term investors, especially those looking for companies that aren't just betting on one theme or idea to pay off.
