Cathie Wood is known for her foresight in the technological domain, particularly in the AI arena. As the brain behind Ark Investment Management, famed for its innovative ETFs concentrating on tech stocks, Wood pointed towards a lucrative opening in the AI sector regarding software entities last year. Wood speculated that endeavors in this niche could lead to an astounding achievement, generating $8 in revenue for every $1 spent on AI data center chips from suppliers like Nvidia, setting the stage for exponential growth.
Wood’s actions align with her words as she has dived headfirst into AI software enterprises like xAI, Anthropic, and OpenAI through the private Ark Venture Fund postulating a promising future. This strategic move is further reinforced by Ark’s ETFs currently holding notable AI software stocks including Tesla, Palantir, Meta Platforms, and Microsoft.
Alphabet’s AI-Powered Transformation
Alphabet, a tech conglomerate housing Google, YouTube, and the autonomous driving venture Waymo, finds itself at the vanguard of a transformative journey. Google Search, which contributed more than half of Alphabet’s $84.7 billion revenue in the second quarter of 2024, enjoys a market share dominance of 90% in the online search landscape. However, this dominance faces an unprecedented challenge courtesy of artificial intelligence.
AI-powered bots such as OpenAI’s ChatGPT offer instantaneous responses to user queries enabling swift access to a plethora of information across diverse domains. In contrast, Google’s traditional search model necessitates users to scour through web pages, a methodology that generates revenue through businesses paying for the promotion of their websites in search results. Despite its significance, the traditional search model is under siege.
Instead of defending an outmoded system, Alphabet has boldly embraced change. Users querying Google Search are now greeted with AI-generated text-based responses above search results, expediting information retrieval. In a strategic stride, Google unveiled AI Overviews earlier this year, enhancing user experience by providing comprehensive responses with links to external websites. This feature not only bolsters user engagement but also carries the promise of substantial future advertising revenue.
Furthermore, Alphabet’s AI models under the moniker Gemini, accompanied by a chatbot of the same name, demonstrate prowess in answering intricate queries and generating content like text and images. Gemini, offered as an add-on in Google Workspace, a home to productivity tools such as Gmail and Docs, holds the potential of driving subscription-based revenue to remarkable heights over time.
The Ascendancy of Google Cloud within Alphabet
While Google Search reigns as Alphabet’s primary revenue source, Google Cloud is charting an unparalleled growth trajectory, exhibiting a double-paced progress. This segment recorded a record revenue of $10.3 billion in the second quarter of 2024, marking a 29% surge from the same period in the previous year, eclipsing the 13.7% growth in Search.
A linchpin in aiding businesses to thrive amidst the digital upheaval, Google Cloud furnishes a repertoire of services ranging from data storage to web hosting and software development tools. More significantly, it has emerged as a front-runner in AI services provisioning.
Google Cloud’s data centers offer developers access to the requisite computational muscle for crafting AI software. Developers can leverage a spectrum of cutting-edge pre-built large language models (LLMs), including the formidable Gemini model and over 130 others from acclaimed startups and third-party developers, to expedite their endeavors.
Not content with resting on these laurels, Google Cloud is engineering custom data center chips to widen the array of choices available to AI software developers, setting it apart from competitors reliant on third-party chip suppliers like Nvidia. The recent launch of Trillium, Google’s sixth-generation tensor processing unit (TPU), represents a quantum leap in computational efficiency, boasting nearly five times the peak computing capability of its predecessor.
Quintessentially, the deployment of swifter chips translates to substantial cost reduction for AI developers who pay for computing capacity by the minute. In consonance with Wood’s prescient projections, Google stands to reap immense benefits if it successfully undertakes chip production at scale, obviating the need to funnel billions of dollars to suppliers such as Nvidia.
Alphabet Stock: The Potential for Prosperity with an Asterisk
During the past four quarters, Alphabet has clocked $6.97 in earnings per share. Despite trading at $161.85 at the time of writing, signifying an apparent undervaluation, a significant caveat looms over Alphabet’s stock.
Insights into Alphabet: A Regulatory Storm or a Silver Lining?
Alphabet: The Cheapest Among Giants
Alphabet stands at a price-to-earnings (P/E) ratio of 23.2, positioning itself as the most reasonably priced among U.S. technology firms valued at $1 trillion or more.
The Antitrust Lawsuit and Its Implications
Despite Alphabet’s financial attractiveness, a significant challenge looms large in the form of a 2020 antitrust lawsuit filed by the U.S. Department of Justice (DOJ). The lawsuit alleges monopolistic practices by Alphabet, accusing the company of paying Apple up to $20 billion annually to secure the default search engine spot on Apple devices.
The recent court ruling favoring the DOJ has cast a shadow of uncertainty over Alphabet’s future. Potential consequences could range from financial penalties to a mandated breakup of the tech giant’s entire operations.
The Road Ahead: A Battle for Survival
While the prospect of a breakup seems extreme, analysts predict a resolution through settlement within the next 18 months. This resolution may include financial penalties and alterations in Alphabet’s business dealings to address antitrust concerns.
Should no settlement materialize, a prolonged legal battle and appeals process await, maintaining the status quo for the time being. Despite the regulatory turmoil, Alphabet’s current stock price offers compelling value, with potential for significant gains once the storm settles.
Investing in Alphabet: A Calculated Gamble
Considering Alphabet for investment purposes calls for caution and strategic planning. Assessing the long-term implications of the regulatory challenges is essential before making any investment decisions.
While Alphabet may not be among the top 10 recommended stocks by the Motley Fool Stock Advisor team, history has shown that even overlooked stocks can rebound spectacularly. For instance, Nvidia, once omitted from such lists, grew astronomically over time, demonstrating the unpredictable nature of the stock market.
Final Reflections: An Uncharted Path
In the turbulent waters of regulatory scrutiny, Alphabet remains a beacon of potential amidst the storm. Navigating this uncertain terrain requires a blend of patience, foresight, and risk management to capitalize on potential opportunities while mitigating regulatory risks.
