OpenAI, the creator of ChatGPT, is largely credited with kicking off the artificial intelligence (AI) boom that just turned three. The release of this revolutionary chatbot in late 2022 put the world on notice that generative AI had sparked a paradigm shift in technology that continues to this day.
Many of the world's biggest tech companies scrambled to develop their own AI models. The biggest cloud providers, including Amazon Web Services, Microsoft Azure, and Alphabet's (GOOGL +0.62%) (GOOG +0.19%) Google Cloud, along with Meta Platforms, have all been spending heavily to stake their claim to the windfall of profits expected to flow from the implementation of AI.
Until recently, Google's efforts were viewed with skepticism after numerous high-profile (and embarrassing) setbacks. However, just this week, OpenAI CEO Sam Altman made waves with a development that marked incredible news for Alphabet investors.
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The heat is on
Altman issued a communique this week that raised eyebrows. The chief executive said that OpenAI was declaring a "code red," according to a report that first appeared in The Wall Street Journal. The company is now focusing primarily on improvements to ChatGPT and, at the same time, pausing many of its other efforts.
The company had been working to develop AI tools for advertising, AI agents focusing on digital retail and healthcare, and was even working on an AI-powered personal assistant dubbed Pulse. OpenAI is temporarily suspending those efforts to focus on ChatGPT. The emphasis will be on improving the user experience and making ChatGPT "even more intuitive and personal," according to the report.
Altman sounded the alarm after the release of Google's most recent AI model, Gemini 3, which launched last month. The large language model (LLM) caught its rivals off guard, as it leapfrogged ahead of the competition, outperforming competing chatbots in more than a dozen industry benchmark tests. The latest version of Gemini has generated significant buzz on social media and is earning praise from users.
One high-profile example is Salesforce CEO Marc Benioff. In a post on X, he announced he was switching to Gemini after using "ChatGPT every day for three years." He went on to say, "The leap is insane -- reasoning, speed, images, video... everything is sharper and faster." The chief executive was clear: "I'm not going back."
Gemini is quickly closing the gap in terms of users, which numbered 650 million weekly in October, up from 450 million in July. For context, OpenAI has 800 million.
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What this means for Alphabet investors
Alphabet has had a number of setbacks since the dawn of AI. The release of its first chatbot, dubbed Bard, in early 2023 marked the first in a long string of high-profile AI-related failures.
In response to a question about new discoveries by the James Webb Space Telescope during Bard's public demo, it incorrectly stated that it "took the very first pictures of a planet outside our own solar system." The National Aeronautics and Space Administration (NASA) quickly pointed out that the first image of an exoplanet came courtesy of the European Southern Observatory's Very Large Telescope (the actual name) back in 2004.
The biggest fear for Alphabet shareholders is that a rival would develop a more compelling AI-powered search algorithm. This would spell trouble for the company, as Google search, the resulting ad revenue, and other ancillary services make up roughly 85% of Alphabet's total revenue. Gemini has already been plugged into Google Search, powering its AI Mode, which has driven a 10% increase in search queries. This would seem to ease concerns that the company's search and the resulting ad revenue could be at risk.
Gemini's recent success marks a clear vindication for Google. For investors, the implication is clear. After years of setbacks and being viewed with skepticism, the company has found its footing in the AI race and has a clear path forward.
Yet for all that opportunity, Alphabet has an attractive valuation. The stock is currently selling for 31 times earnings, on par with the S&P 500.
That makes Alphabet stock a clear buy to capitalize on the AI boom.
