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Alphabet (GOOG) (GOOGL) has been trading at a growing discount to its FAANG and "Magnificent Seven" peers this year, despite having one of the best artificial intelligence (AI) businesses on the planet today. As we learn more about the disruptive long-term potential of generative AI, it's hard to imagine a world where Alphabet is not one of the big winners.
Arguably, Alphabet is the stock to own if you want top-tier AI exposure, given AI has been a top focus of the company for many years - even decades! It's been investing and innovating on the AI front since well before ChatGPT launched nearly a year ago. The way I see it, Alphabet is playing the long game with AI, while many other tech companies are just beginning to play catch up.
Though Alphabet is likely miles ahead of most other tech firms with skin in the AI game, there's a good reason for the relative discount on shares of the search giant. Currently, Google holds the throne when it comes to ad-based search. And AI represents a disruptive force that could upset the company's seemingly untouchable search business.
The only question is, will Alphabet harness the full power of AI to defend its turf? Or will another firm — likely a member of the Magnificent Seven — leverage AI to take a big chunk of market share away, as search and ads move into the AI age?
Google Could Be an Even Bigger Winner in the AI Era
I believe Google is not only capable of defending its turf in search - it'll also be able to take its search business to the next level, as it massively improves its business with the help of cutting-edge generative AI tech (think how much better search can be with Bard AI).
Further, Google Cloud could be in for a significant growth re-acceleration, thanks in part to AI innovation. And let's not forget about Alphabet's other projects (specifically its autonomous driving division, Waymo) that could go from zero to 100 at the hands of AI.
All considered, we will be looking back at Alphabet stock a few years from now, wondering why shares were so discounted relative to their peer group. At the time of this writing, shares of GOOGL trade at 29.26 times trailing price-to-earnings (P/E), or 24.33 times forward P/E. At these prices, shares represent a phenomenal value, especially for those who are put off by the loftier prices of admission to the other members of the Magnificent Seven cohort.
Could it be that Alphabet stock is the most magnificent of the Magnificent Seven? While there is a real risk that Google's search dominance could deteriorate if it fails to stay competitive on the AI front, I do think the firm is not only capable of keeping up with peers like Microsoft (MSFT) in the AI age - it's capable of dominating.
Sergey Brin's Return is a Major, Overlooked Catalyst for Google
Google co-founder Sergey Brin has come out of retirement, and he's been getting his hands dirty with AI projects over at Alphabet. Undoubtedly, Brin is the genius behind the search engine we all know, love, and take for granted these days. And though only time will tell if Brin can help the firm evolve in the AI age, I certainly would not bet against the company, now that one of the greatest visionaries of our time is back in the coder's seat.
Brin may not be optimal CEO material, at least compared to the likes of Alphabet's current CEO, Sundar Pichai. That said, Brin is an engineer at heart, and he seems passionate about being in the trenches when it comes to emerging technologies that could change the world. With a willingness to roll up his sleeves, Brin may contribute to the projects that ultimately take the company to the next level.
For now, it's hard to make out what Brin will bring in his return to Google. Personally, though, I couldn't be more bullish on the man's return, especially as the market begins to favor Alphabet's peers at this point in the AI race.
The Bottom Line
Alphabet seems to be going all-in on AI. And though the stock is up a great deal from last year's lows - by around 66% - I find there to be a lot more room to run as the generative AI race moves into its second year.
