Artificial intelligence (AI) has created a lot of buzz since early last year. Even as the technology has been around since the 1950s, recent developments show that these algorithms have improved by an order of magnitude. Generative AI has shown its mettle for a wide and growing variety of tasks, including streamlining processes, creating original content, and increasing productivity, with a flood of new applications on the drawing board.
Alphabet (GOOGL 0.23%) (GOOG 0.23%) CEO Sundar Pichai is emphatic that these algorithms will change virtually everything. "Over time, AI will be the biggest technological shift we see in our lifetimes. It's bigger than the shift from desktop computing to mobile, and it may be bigger than the internet itself."
The opportunity is enormous. The generative AI market is expected to be worth between $2.6 trillion and $4.4 trillion annually over the coming decade, according to global management consulting firm McKinsey & Company. Companies at the leading edge of this technological shift will be among the first to profit from this expected windfall, enriching investors along the way.
There a plenty of companies that will benefit from AI, but I believe Alphabet represents a particularly compelling opportunity.
Image source: Getty Images.
An industry leader and more
In order to understand the magnitude of the opportunity, it's important to view AI through the lens of Alphabet's existing business interests, which are considerable.
Google has been the search leader for nearly a quarter of a century, recently controlling 91% of the market, according to internet statistics aggregator StatCounter. The company has consistently improved its algorithms over the years and, in so doing, has become the gold standard.
Its search engine is the conduit for the company's industry-leading digital advertising. It's estimated that Google controlled roughly 39% of the market last, according to online data company Statista. The company's advertising chops are well-documented, and while many competitors have surfaced over the years, Google continues to hold the high ground.
After years of stagnation, the digital advertising industry is mounting a long-awaited recovery, which will benefit Alphabet. Indeed, the company just posted its best year-over-year revenue growth rate in nearly two years, with digital advertising leading the charge.
Let's not forget Google Cloud, the world's third-largest cloud infrastructure provider. While it still trails Amazon Web Services (AWS) and Microsoft Azure at No. 1 and No. 2, respectively, it's growing faster than the industry average. Google Cloud grew 28% year over year in the calendar first quarter, outpacing AWS's 17% growth, but lagging Azure's 31% growth.
Gemini, the twins
Alphabet's twin offerings of Google Search and Google Cloud represent two distinct ways for the company to profit from recent advancements in generative AI.
Late last year, Alphabet unveiled Gemini, the company's "largest and most capable AI model." This week, at Google's I/O 2024 Developers Conference, it debuted a host of new cutting-edge features designed to help Google maintain its stranglehold on the search market and boost the stickiness of its ancillary services.
Gemini will use generative AI to organize how search results are displayed and will offer AI Overviews for more complicated queries. It also enables video search -- whereby a user can ask a question and upload a short, supporting video to find answers. Additional features, including meal and travel planning, are currently being tested in Search Labs and are expected to be released to the public later this year.
The second prong of Alphabet's opportunity is the company's cloud AI offerings. At Google's Cloud Next event last month, the company announced that Gemini 1.5 Pro, its flagship large language model (LLM), was available for public preview on its Vertex AI platform. This week, Alphabet highlighted Gemini's multimodal capability, calling it "a frontier model built to be natively multimodal from the beginning, that [can] reason across text, images, video, code, and more." This gives developers the ability to create complex and flexible AI models from scratch.
The Vertex AI platform now offers more than 150 prebuilt AI models, including Google's own, open-source, and third-party models. With these, Google Cloud customers can accelerate their own AI development "to build, deploy, and scale AI-powered applications," according to the company. There's also Duet AI, which has been "specifically trained to help users be more productive on Google Cloud."
Generative AI will not only help Google maintain its lead in search, but will likely help the company gain market share in the cloud.
Historically cheap
While it has many other products and services, Alphabet offers an intriguing combination of search, digital advertising, and cloud infrastructure services -- and each of its major business segments will get a boost from AI.
Despite all this opportunity, Alphabet stock is attractively priced, selling for roughly 26 times earnings, cheaper than the price-to-earnings (P/E) ratio of 27 for the S&P 500 -- even though Alphabet stock has delivered triple the returns of the market index over the past decade. That makes Alphabet a once-in-a-generation investment opportunity.
