Finance
Generative AI Sales Could Rise 2,026%: This Is My Pick for the Best AI Stock to Buy Right Now (Hint: Not Nvidia)
Genative 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 may have been the biggest winner during the early stages of the generative AI boom. Nvidia shares are up 680% since the start of 2023.
However, the market is expanding rapidly, and countless companies will benefit in the long run. In fact, Bloomberg Intelligence says that sales of generative AI across hardware, software and services could increase by 2,026% to $1.4 trillion by 2032. This presents investors with a unique opportunity.
This is why Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is my pick for the best AI stocks to buy right now.
Alphabet’s growth accelerated in the first quarter
Alphabet reported great financial results in the first quarter. Revenue rose 15% to $80.5 billion, driven by particularly strong momentum in Google Cloud and generally accepted accounting principles (GAAPNet profit rose 57% to $23.7 billion as the company continued to optimize its cost structure. Sales and net profit growth have now accelerated for four consecutive quarters.
The chart shows first-quarter revenue growth across Alphabet’s four major product categories.
Alphabet has a strong presence in digital advertising and cloud computing
Google Advertising includes sales through Google Search, YouTube, and Google Network. In the first quarter, ad sales fell across the Google Network, which includes millions of third-party web properties. But sales accelerated on Google Search and YouTube. That’s encouraging because these platforms are at the core of Alphabet’s dominance in digital advertising, and some investors are concerned generative artificial intelligence (AI) could dethrone the company as search leader.
However, according to StatCounter, Google remains the leading Internet search engine as measured by referrals (i.e. clicks on search results), with a market share of over 90%. Moreover, YouTube is the most popular streaming service, measured by viewing time. These platforms allow Alphabet to engage internet users and capture data on a massive scale. Advertisers value the company’s reach and insight – so much so that Alphabet accounted for 28.1% of digital ad sales last year, 6.6 percentage points more than its nearest competitor.
Meanwhile, Google Cloud Platform is the third largest provider of cloud infrastructure and platform services. The alphabet is still lagging behind Amazon Web services and Microsoft Azure is up by a wide margin, but it has gained a percentage point of market share over the past year, and the market share gains could continue as the generative AI boom gains popularity.
Alphabet is using generative AI to boost its advertising business
Alphabet is widely considered a leader in artificial intelligence research, but OpenAI made a leap forward in generative AI when it launched ChatGPT in November 2022. Alphabet has since struggled to regain its position and, despite a few missteps along the way, its latest version of Gemini (released in May) could help bridge 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 ways that could cement its dominance. For example, Gemini lets marketers create media assets and set up campaigns using natural language, and the company is experimenting with interactive ads tailored to individual users.
In addition, Alphabet is adding AI summaries to Google Search, a feature that uses generative AI to provide short summaries on queried topics. The overviews also help users quickly gain insight into more complex topics. During the recent earnings call, CEO Sundar Pichai told analysts that AI overviews increase Google Search usage and user satisfaction.
Alphabet is using generative AI to boost its cloud computing business
Alphabet also uses Gemini to create monetization opportunities in Google Cloud, the business segment consisting of cloud computing services (Google Cloud Platform) and business productivity software (Google Workspace). For example, Gemini automates tasks in Workspace applications. It can compose 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 with training and deployment tools. Customers can also use Gemini to build generative AI applications that can query (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. Together, product innovation around Gemini and powerful infrastructure are bringing businesses to Google. More than 60% of funded generative AI startups and 90% of generative AI unicorns are Google Cloud customers.
Alphabet’s shares trade at a reasonable valuation
Digital advertising spend is expected to grow 15% annually through 2030, while the cloud computing market is expected to grow 21% annually over the same period. Wall Street analysts expect slower revenue growth of 10.5% per year from Alphabet, but that leaves room for upside depending on how successfully the company turns generative AI into its advertising and cloud computing businesses.
Personally, I think Alphabet has a good chance of exceeding the revenue growth forecast by Wall Street analysts. But the 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.
Should you invest €1,000 in Alphabet now?
Before you buy shares in Alphabet, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Alphabet wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $697,878!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns May 28, 2024
Suzanne Frey, a director 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 Jennevine has positions in Amazon and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
Generative AI Sales Could Rise 2,026%: This Is My Pick for the Best AI Stock to Buy Right Now (Hint: Not Nvidia) was originally published by The Motley Fool
