Alphabet could be a big winner as the creative artificial intelligence boom builds steam.
Generative artificial intelligence (AI) took center stage when OpenAI introduced ChatGPT in late 2022. Nvidia CEO Jensen Huang recently called it “the defining technology of our time,” and his company has been one of the biggest winners in the early stages of the generative AI boom. Nvidia shares are up 680% since the start of 2023.
However, the market is expanding rapidly, and countless companies will benefit in the long run. In fact, Bloomberg Intelligence says sales of AI-enabled hardware, software and services could grow 2,026 percent to $1.4 trillion by 2032.
Here's why the alphabet (GOOG -0.35%) (GOOGL -0.28%) Here are my picks for the best AI stocks to buy right now.
Alphabet's growth accelerated in the first quarter
Alphabet reported excellent financial results in the first quarter. Revenue rose 15% to $80.5 billion, driven by particularly strong momentum in Google Cloud, and generally accepted accounting principles (GAAP) net income rose 57% to $23.7 billion as the company improved its cost structure. Continued making. Revenue and net income growth have now accelerated for four consecutive quarters.
The chart shows first-quarter revenue growth in Alphabet's four core product categories.
Alphabet's first-quarter revenue growth across its four core product categories.
Alphabet has a strong presence in digital advertising and cloud computing.
Google advertising includes sales of Google Search, YouTube and the Google Network. In the first quarter, ad sales declined across the entire Google network, which consists of millions of third-party web properties. But sales on Google search and YouTube picked up. That's encouraging because those platforms are central to Alphabet's dominance in digital advertising, and some investors worry that creative artificial intelligence (AI) could dethrone the company as a search leader.
However, according to StatCounter, Google is the leading Internet search engine as measured by referrals (i.e. clicks to search results), with over 90% market share. Additionally, YouTube is the most popular streaming service as measured by watch time. Those platforms allow Alphabet to engage Internet users and capture massive amounts of data. Advertisers value the company's reach and insight — so much so that Alphabet captured 28.1 percent of digital ad sales last year, 6.6 percent more than its closest competitor.
Meanwhile, Google Cloud Platform is the third largest provider of cloud infrastructure and platform services. The alphabet still trails Amazon Web Services and Microsoft Azure by a wide margin, but it gained a percentage of market share over the past year, and the share gains could continue as the generative AI boom builds steam.
Alphabet is using generative AI to boost its advertising business.
Alphabet is widely recognized as a leader in artificial intelligence research, but OpenAI took a leap forward into creative AI by launching ChatGPT in November 2022. Alphabet has since struggled to regain its footing and despite a few missteps along the way, its latest version of Gemini. (launched in May) can help close this gap.
Gemini is a multimodal generative AI model, meaning it can process text, images, videos, and code. Alphabet is building Gemini into its advertising ecosystem in a number of different ways that could strengthen its dominance. For example, Gemini lets marketers create media assets and create campaigns using natural language, and the company is experimenting with interactive ads tailored to individual users.
Additionally, Alphabet is adding AI Overview to Google Search, a feature that uses generative AI to provide concise summaries on queried topics. Overview also helps users understand more complex topics faster. On a recent earnings call, CEO Sundar Pichai told analysts that AI reviews are driving Google search usage and user satisfaction.
Alphabet is using generative AI to boost its cloud computing business.
Alphabet is also using Gemini to create monetization opportunities on Google Cloud, a business segment consisting of cloud computing services (Google Cloud Platform) and business productivity software (Google Workspace). For example, Gemini Workspace automates tasks in applications. It can draft text in Google Docs, organize data in Google Sheets, and create presentations in Google Slides.
Additionally, Google Cloud customers can customize Gemini with Vertex AI, a machine learning platform that includes tools for training and deployment. Users can also use Gemini to build generative AI applications that can be prompted with (and output content from) a variety of media formats, including text, images, videos, and computer code.
CEO Sundar Pichai recently told analysts that Google has “excellent infrastructure” for artificial intelligence, including custom chips called tensor processing units (TPUs) and cutting-edge graphics processing units (GPUs) from Nvidia. Included. Collectively, the product innovation and powerful infrastructure around Gemini are driving business to Google. Over 60% of funded generative AI startups and 90% of generative AI unicorns are Google Cloud users.
Alphabet shares trade at fair value.
Going forward, digital ad spending is predicted to grow by 15 percent annually through 2030, and the cloud computing market is expected to expand at a rate of 21 percent annually over the same period. Wall Street analysts expect Alphabet to post 10.5% annual sales growth, but that depends on how successfully the company monetizes generative AI in its advertising and cloud computing businesses.
Personally, I think Alphabet has a good shot at exceeding Wall Street analysts' sales growth forecasts. But its current price of 7.3 times sales is reasonable either way, so investors should consider buying a short position in this AI stock today.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Trevor Genuine holds positions in Amazon and Nvidia. The Motley Fool has positions and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a Disclosure Policy.