AI has made big waves in the stock market but many investors are still trying to figure out what it means for some of the biggest companies on the planet. Take Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) as an example. On one hand, some investors have grown nervous about what AI usurping search as a digital navigation tool could mean for Alphabet’s profits – and its stock price.
On the other hand, AI could be a potential game-changer for Alphabet, in a positive way. It already has deep technical expertise and a large base of regular users.
AI may help it cut costs, while also improving the range of services it offers users and helping them spend even more time engaging with Alphabet’s products and services.
I’ve been buying
I have held Alphabet stock at various points over the years and this month added it back into my portfolio.
This year it hit an all-time high and currently stands about 8% away from that. So it may not seem like an obvious bargain.
Alphabet stock is selling on a price-to-earnings ratio of 21.
That is not exactly dirt cheap, but I think it is potentially a long-term bargain given Alphabet’s strengths. It has a proven business model, massive entrenched customer base, and generates enormous cash flows.
Not only that, but AI could open up lots of new opportunities for it. Its revenues last quarter showed 13% year-on-year growth. Importantly, this seems to have been helped not hindered by the company’s growing use of AI.
As Alphabet noted in its earnings release for the second quarter, “Search delivered double-digit revenue growth, and our new features, like AI Overviews and AI Mode, are performing well.”
There are some possible concerns
So, is AI already a proven boon for an already strong business?
Not necessarily, from a long-term perspective. So far, AI appears to be positive for the company’s search business, but that could change. Google tools like AI overviews are still delivered within a search framework. Competitors may find ways for AI to navigate users’ queries without them needing to search at all. That could see use of Google’s core search business drop dramatically.
The cost of investing in AI readiness is also a risk to Alphabet’s typically healthy profit margins.
The firm is ramping up annual capital expenditures significantly to $85bn this year. That is a big number, even for Alphabet.
Last year’s capex of $53bn was already a big jump from $32bn the prior year. This sort of huge expenditure could help Alphabet cement its competitive advantage in big data. But, at least for the foreseeable future, I think it will weigh heavily on profitability.
Potential for future growth
Only time will tell whether such massive costs are justified by the business potential.
But Alphabet has shown many times in the past that it is able to monetise its technological skill and user base. If AI can help it take that to the next level, it could be good for long-term profits.
I see Alphabet stock as offering potentially good value. That is why I have invested.
