Alphabet (GOOG 1.56%)(GOOGL 1.65%) entered the year in a precarious position. The company faced a lawsuit from the U.S. Department of Justice (DOJ) that threatened to significantly impact its business. Meanwhile, the emergence of conversational chatbots, like OpenAI's ChatGPT, prompted a wide swath of investors to question whether Google could maintain its dominant position in the ever-evolving search space.
Fast-forward to today, and not only has Alphabet seemingly overcome these challenges, at least for now, but the stock has also rocketed nearly 68% higher (as of Nov. 26). Once viewed as an artificial intelligence (AI) laggard, Alphabet now appears to be a leader in the AI space.
From laggard to leader
Alphabet has long been regarded as one of the most innovative tech companies, working on everything -- from self-driving vehicles to quantum computing. But AI has hit hard and fast, forcing tech companies to play catch-up. It's also difficult for investors to determine what inning of the game we are in and how much the technology can actually disrupt society as we know it.
Image source: Getty Images.
Earlier this year, the company faced several threats. The first stemmed from a very consequential DOJ lawsuit that alleged Google employed monopolistic practices in digital advertising and search, unfairly excluding competition. Keep in mind that over half of Alphabet's revenue comes from its Google Search & Other business division.
A federal judge sided with the DOJ, which then requested that the judge order Alphabet to divest its Google Chrome business, a significant component of the company's search business. Interestingly, the judge did not force Google to divest Chrome, specifically citing competition from AI chatbots like ChatGPT and Perplexity, which may no longer make Google a monopoly in the search space.
However, Google appears to have addressed many of these concerns. Its AI Overview summaries, which appear at the top of most Google Search queries and are powered by the company's Gemini AI model, have impressed investors. Billionaire Bill Ackman's fund, Pershing Square Capital Management, which owns a significant stake in Alphabet, applauded AI Overviews in a letter to shareholders in August, stating that the feature has resulted "in users asking more detailed questions, clicking through at higher rates and searching with greater frequency."
Following the success of Overviews, Google launched AI Mode, an integrated feature within the search engine, designed to rival chatbots like ChatGPT. Alphabet's stock also rose after the company announced it is rolling out its new AI model, Gemini 3, which is expected to provide enhanced answers to more complex questions, requiring less user prompting.
Analysts at HSBC stated in a research report released in October that they expect innovations like this to enable Google to maintain its dominant 90% market share in the traditional search market.
NASDAQ: GOOG
Key Data Points
Recently, The Information reported that Google has begun approaching other hyperscalers, such as Meta Platforms, to sell its own in-house, specialized chips that hyperscalers can use in their data centers.
The news sent the stocks of other chipmakers, such as Nvidia, down abruptly, as investors feared that Google could pose a significant threat in the space. Google's custom chips, called Tensor Processing Units (TPUs), are better suited for training large language models on specific tasks, while Nvidia's graphics processing units (GPUs) are designed for broader-purpose training. Even so, The Information reported that Google's TPUs could potentially target up to 10% of Nvidia's business.
Well positioned for the continuing AI race
Alphabet is a perfect example of how quickly things change in the AI race. Earlier this year, investors expressed concerns about Alphabet's ability to compete in certain areas of AI. Now, Google appears to be firing on all cylinders. Not only does it appear poised to maintain its dominance in the search space, but the integration of AI mode into the search engine could also prove to be a powerful enough combination to ward off threats from the likes of ChatGPT.
The emergence of its chip business could also be something to get excited about. In addition, Google is a leader in many other tech and AI subsectors, including content through YouTube, cloud services via Google Cloud, generative AI through its autonomous driving division, Waymo, and an impressive quantum computing division.
For investors seeking exposure to AI, investing in a company like Google is safer than investing in a pure-play AI stock because the company has a diverse portfolio of businesses that are leaders and have strong growth runways ahead of them.
