Despite Its Recent AI Blunders, This "Magnificent Seven" Stock Is Still a Buy and Hold

This year's news cycle has been dominated by artificial intelligence (AI), and companies across tech are racing to release the most efficient and effective AI tools possible. Microsoft, now the world's largest company by market capitalization, took an early advantage with its backing of OpenAI, the pioneering creator of the large language model (LLM) known as ChatGPT.

Since the release of its first public iteration, ChatGPT-3, in late 2022, the rest of the "Magnificent Seven" has been playing catch-up, and Alphabet (GOOG 0.75%) (GOOGL 0.62%) has the most to prove.

Google falls short, disappointing investors

Large language models like ChatGPT could revolutionize the way people access information on the internet, so its release was seen by many as an existential threat to Google's core business, Search. So much so that the company called in founders Larry Page and Sergey Brin for strategy meetings.

Google quickly announced the release of its LLM chatbot, Bard, and its integration with Search. It did not go well. The announcement GIF was supposed to show how Bard could "help simplify complex topics," but instead showed Bard providing an inaccurate answer. Bard suggested that the James Webb Space Telescope was used to take the first pictures of planets outside our solar system. It did not.

Investors were spooked. Shares of Alphabet dropped as much as 9% the day after the GIF went live and the inaccuracy was discovered, trading at nearly three times the 50-day moving average volume.

Behind the scenes, calls were mounting from within the company to delay Bard's release. As reported by Bloomberg, employees who were testing the AI described it as, among other things, "a pathological liar" and "worse than useless," providing some answers "which would likely result in serious injury or death." Despite this, Google released Bard to the public in March 2023. After six months on the market, the AI's popularity lagged far behind ChatGPT-3's, receiving only 13% of its competitor's traffic.

Earlier this year, Google rebranded the project, calling it Gemini and promising a new and improved experience. Soon after its launch, however, the company had to suspend image generation on the platform. Gemini produced albeit inclusive content but with historical "inaccuracies," like images of female or African-American Popes.

Alphabet's stock slipped nearly 5% in the two days following the suspension.

Alphabet is still a great bet

These hiccups have created an opportunity; the stock has been suppressed by the negative sentiment. The more time passes, the more the company's recent blunders will fade into memory. Of course, this hinges on Google not shooting itself in the foot, but there is good reason to believe the company will deliver on future iterations of Gemini.

Google has been at the forefront of AI research for years and has attracted some of the best minds in the field. The first iteration of the company's dedicated AI arm, then called Google Brain, was founded over a decade before the release of ChatGPT-3. This deep expertise and long history will help the company continue to innovate and build more capable versions of Gemini.

More importantly, the company's core business remains strong. Google Search is so embedded in most of our lives that an AI-powered alternative would have to be light years ahead to materially affect Google's dominance. Over 95% of mobile searches globally happen via Google, a figure that's remained virtually unchanged since 2015 -- Bing's market share is only 0.52%. Google Search revenue was up over 14% for Q1 2024 (period ended March 31, 2024) compared to the same period last year.

Chart by author. Data Source: Company filing. YOY= Year over Year.

And it's not just Search. Alphabet's latest financials show growth across the company. Google Cloud, which powers AI applications like Gemini, saw a 28% jump in revenue year over year. YouTube advertising, another segment investors feared would be threatened by AI-powered competition, grew 21%, putting those fears to bed. Monitor these metrics as key indicators of the company's health and growth potential.

The bottom line is that despite the stumbling blocks, the company is working to right the AI ship, and given its long history of leadership in that field, it is likely to deliver. And critically, the company is doing so from a strong financial and cash position, continuing to deliver on its core business while growing other segments, making it a buy and a long-term hold in my book.