Choosing just one artificial intelligence (AI) stock to have in your portfolio is nearly impossible. Few companies are perfectly dedicated to AI, but a lot of them have their fingers in AI as well as other areas, so just by having a well-balanced portfolio, you'll end up owning multiple AI stocks.
But if I had to choose one, it would be Alphabet (GOOG -0.15%) (GOOGL -0.17%).
Alphabet's AI ecosystem reaches nearly all areas
Some may find it interesting that I didn't pick Nvidia, the undisputed king of AI hardware. Or maybe you'd expect me to choose Microsoft because it partnered with the company many consider to be in first place in the generative AI race, OpenAI.
However, I think Alphabet represents a nice compromise between these two spectrums.
First, Alphabet kept the development of its generative AI model in house. This is critical, as problems will eventually arise with any model. (For Alphabet's Gemini, several problems already arose and were corrected.) For tech giants like Microsoft or Apple to not develop their own generative AI model seems a tad lazy and could potentially cause them problems down the road. I think Alphabet's strategy gives it a leg up on many of its competitors.
On the hardware front, Alphabet is a major buyer of Nvidia graphics processing units, but it also developed its own chips that are tailor-made for training and running AI models. While Nvidia's GPUs are fantastic for general-purpose AI training or workloads, clients can get better performance if they use hardware developed with AI model training in mind. That's where Alphabet's Google Cloud tensor processing units (TPUs) enter. Because TPUs were specifically created to run AI workloads, they are more efficient and faster than Nvidia's GPUs for training AI models.
However, workloads must be set up in a particular fashion to benefit from using TPUs, so Nvidia GPUs will continue to be popular (which is why Google Cloud has so many of them). But as businesses become more familiar with creating AI models, Google Cloud's TPUs may see a surge in popularity. With this hardware only available to Google Cloud customers, it gives Alphabet another layer of AI exposure.
Alphabet is also an avid user of AI. It long used AI to understand website content to increase the probability that Google's search results are giving users what they are looking for. Additionally, it has used AI to identify patterns to better target their ads to their viewers.
Lastly, Alphabet has many tools for the developers of AI models. This is critical, as any developer who uses Alphabet's tools will likely be locked into Alphabet's ecosystem, which will allow Alphabet to extract maximum value from them.
These are just some reasons why I believe Alphabet is a top AI stock to own. But the price at which you can buy it now is also compelling.
Alphabet's stock doesn't carry a big price tag
Unlike many of the other companies I've mentioned, Alphabet isn't trading at an outrageous premium. Because many tech companies are experiencing drastic changes to their bottom lines thanks to AI-related demand, let's use the forward price-to-earnings (P/E) ratio to assess their relative valuations.
GOOGL PE Ratio (Forward) data by YCharts
By using the S&P 500 as a broad market index to compare these valuations, we can get an idea of how expensive they are compared to the broader market. With the S&P 500 trading at 21.7 times forward earnings, Alphabet is hardly given a premium compared to the other three.
While Nvidia is in a league of its own regarding growth, Alphabet's growth rates are similar to Microsoft's and much faster than Apple's, making it a much more attractive stock to own.
Alphabet is a fantastic AI stock, no matter how you assess it. While a proper portfolio is filled with many stocks, Alphabet would be at the top of my shopping list if I had to choose just one.
