Did Google Just Give Investors a Reason to Load Up on the Stock?
The artificial intelligence (AI) wars are heating up. Companies are investing boatloads of capital in a race to try to stay ahead in this fast-moving technology space, pitting well-financed start-ups like OpenAI versus the large technology giants.
One company just threw a sharp shot across the bow: Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). The parent company of Google, YouTube, and Google Cloud is putting out new AI products left and right coming from its recent developer conference and has all the tools to win in this new product category.
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And yet, the stock remains cheap and well below all-time highs while other AI-related stocks such as Nvidia soar. Did the company's recent announcements just give investors a reason to buy up this stock?
Let's dig in further and find out.
Advancements in AI capabilities
The number of AI products that Alphabet is working on is staggering. Just last month, the company added new AI features for Google Search, launched shopping in Google AI Mode, debuted its prototype mixed-reality AI glasses, added a lifelike video generator in Veo 3, and much more.
Gemini is the crux of Alphabet's AI strategy, the large language model that underpins its AI chatbot application. As of the latest updates, users can talk with Gemini Live, perform computer coding with language prompts, create cinematic videos and images, and virtually try on clothes. Alphabet does not only want to integrate Gemini as a productivity tool, but also help people use it to consume more through the internet such as with online shopping and travel planning.
The company is working to monetize these advancements through both subscriptions and advertising. Its Google AI Pro plan is $20 a month, and it just launched Google AI Ultra for $250 a month catered to professionals wanting the latest advancements in AI (for example, video editors). The plan also comes with 30 terabytes of storage, making it a reasonable bundle even at an extreme price for those who need the storage. Like its legacy Google Search business, Alphabet is planning ways to help brands advertise through its AI responses.
Some of these tools may disrupt revenue from Google Search. However, overall I believe all of these tools will increase how much people rely on Google products, which will lead to future revenue growth. This contradicts the narrative that Google is losing in AI, which has kept the stock price depressed in recent years and perhaps presents a buying opportunity for investors.
Connecting everything together with the Cloud
What makes Alphabet's business so beautiful is how its business units all connect together. Its computer chip development helps it process AI workloads and training, which it has been investing in for years now. YouTube can be used to train its AI while its AI products can help people build more content for YouTube, a self-reinforcing loop that can help revenue grow at YouTube and with these Gemini products.
Most importantly -- and underpinning all of Alphabet's AI ambition -- is the Google Cloud division. This data center and computing infrastructure can help Alphabet sell its AI tools to third parties while giving it more and more scale. The division is helping the company process so much AI usage while start-ups such as OpenAI have to regularly throttle usage. Alphabet is investing $75 billion this year on capital expenditures, mainly related to Google Cloud and AI. This is the linchpin that gives Alphabet an advantage over AI start-ups and most of the competition.
GOOG PE Ratio data by YCharts
Should you buy Alphabet stock?
Let's bring some of Alphabet's financials to the discussion. Alphabet's revenue was $360 billion over the last 12 months, with the majority coming from Google Search and related properties. Over time, this division may be at risk of slowing growth because of consumers switching to AI tools, but I think the company has plenty of up-and-coming products to replace any lost revenue.
Subscriptions and hardware revenue grew 19% year over year last quarter to $10.7 billion, while Google Cloud grew at a blistering pace to $12.26 billion with rapidly expanding profit margins. That, combined that with YouTube as well as Alphabet's revenue coming from products not related to Google Search, should grow to well over $100 billion a year in the near future.
Despite predictions of Alphabet's demise, the company is putting up a great fight in AI, which is leading to growing revenue and earnings. Net income has grown 250% in the last five years to $111 billion, which brings the stock's price-to-earnings ratio (P/E) under 19. Management now pays a dividend yielding 0.5% a year and repurchases stock at a rate that has brought down shares outstanding by a cumulative 11% over the last 10 years.
Alphabet keeps growing its earnings, is buying back stock, and has a huge opportunity ahead to grow its suite of AI services. These recent product announcements should show investors once again that the stock is a cheap buy today if you plan to hold for a decade or longer.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.
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