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 arguably been the biggest winner through the initial phase of the generative AI boom. Nvidia shares have surged 680% since the beginning of 2023.
However, the market is expanding rapidly, and countless companies will benefit in the long run. Indeed, Bloomberg Intelligence says generative AI sales across hardware, software, and services could soar 2,026% to $1.4 trillion by 2032. That puts investors in front of a once-in-a-generation opportunity.
Here’s why Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is my pick for the best AI stock to buy now.
Alphabet’s growth accelerated in the first quarter
Alphabet reported stellar financial results in the first quarter. Revenue increased 15% to $80.5 billion due to especially strong momentum in Google Cloud, and generally accepted accounting principles (GAAP) net income soared 57% to $23.7 billion as the company continued to optimize its cost structure. Revenue and net income growth have now accelerated for four consecutive quarters.
The chart shows first-quarter revenue growth across Alphabet’s four primary product categories.
Alphabet has a strong presence in digital advertising and cloud computing
Google Advertising includes sales from Google Search, YouTube, and Google Network. In the first quarter, ad sales declined across the Google Network, which comprises millions of third-party web properties. But sales accelerated across Google Search and YouTube. That is encouraging because those platforms form the heart of Alphabet’s dominance in digital advertising, and some investors worried generative artificial intelligence (AI) could unseat the company as the search leader.
However, Google remains the leading internet search engine as measured by referrals (i.e., search result clicks), with more than 90% market share, according to StatCounter. Additionally, YouTube is the most popular streaming service as measured by viewing time. Those platforms let Alphabet engage internet users and capture data on an immense scale. Advertisers value the company’s reach and insight — so much so that Alphabet captured 28.1% of digital ad sales last year, 6.6 percentage points more than its closest competitor.
Meanwhile, Google Cloud Platform is the third-largest provider of cloud infrastructure and platform services. Alphabet still trails Amazon Web Services and Microsoft Azure by a wide margin, but it gained a percentage point 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 regarded as a leader in artificial intelligence research, but OpenAI jumped ahead in generative AI when it launched ChatGPT in November 2022. Alphabet has since scrambled to regain its footing and, despite a few missteps along the way, its latest version of Gemini (released in May) could help close the gap.
Gemini is a multimodal generative AI model, meaning it can process text, images, videos, and code. Alphabet is weaving Gemini into its advertising ecosystem in several different ways that could strengthen its dominance. For instance, Gemini lets marketers create media assets and build campaigns using natural language, and the company is experimenting with interactive ads tailored to individual users.
Additionally, Alphabet is adding AI Overviews to Google Search, a feature that uses generative AI to provide brief synopses on queried topics. The overviews also help users quickly make sense of more complex topics. On the recent earnings call, CEO Sundar Pichai told analysts that AI Overviews are boosting 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 across Google Cloud, which is the business segment comprising cloud computing services (Google Cloud Platform) and business productivity software (Google Workspace). For instance, Gemini automates tasks across Workspace 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 comprising tools for training and deployment. Customers can also use Gemini to build generative AI applications that can be prompted with (and output content in) various media formats, including text, images, videos, and computer code.
CEO Sundar Pichai recently told analysts that Google has the “best infrastructure” for artificial intelligence, including custom chips called tensor processing units (TPUs) and the latest graphics processing units (GPUs) from Nvidia. Collectively, product innovation surrounding Gemini and powerful infrastructure are bringing businesses to Google. More than 60% of funded generative AI start-ups and 90% of generative AI unicorns are Google Cloud customers.
Alphabet shares trade at a reasonable valuation
Going forward, digital ad spending is forecasted to grow at 15% annually through 2030, and the cloud computing market is projected to expand at 21% annually during the same period. Wall Street analysts anticipate slower sales growth of 10.5% annually from Alphabet, but that leaves room for upside depending on how successfully the company monetizes generative AI across its advertising and cloud computing businesses.
Personally, I think Alphabet has a good shot at exceeding the sales growth forecasted by Wall Street analysts. But its current valuation of 7.3 times sales is reasonable in either case, so investors should consider buying a small position in this AI stock today.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in 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.
Generative AI Sales Could Surge 2,026%: Here’s My Pick for the Best AI Stock to Buy Now (Hint: Not Nvidia) was originally published by The Motley Fool
Source: finance.yahoo.com