We recently published a list of Top 10 Stocks to Watch as AI Trade Dynamics Change. In this article, we are going to take a look at where Alphabet Inc. (NASDAQ:GOOG) stands against other top stocks to watch as AI trade dynamics change.
Aswath Damodaran from NYU Stern School of Business said in a recent program on CNBC that AI “buzzwords” are not boosting the market anymore as investors grow more concerned about capital spending.
“I’ve said about data centers we’ve gotten way ahead of the game. I mean, the AI product and service business, which ultimately is what has to pay for all of this, has not taken off in any substantial way. I’m hard-pressed to think about any company making significant money from the AI product and service business.”
Damodaran said that the “sobering” of the AI trade started in September last year and the DeepSeek breakthrough in China also had an impact on the industry.
“It’s part of, I think, what you see almost every buzzword in history in the last four decades. I call these the ‘bar mitzvah moment,’ where people wake up and say, ‘Okay, there’s a lot of promise here, but show me something that I can hang my hat on.’”
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A laptop and phone open to Google’s services in an everyday setting.
Alphabet (NASDAQ:GOOG)
Number of Hedge Fund Investors: 160
John Belton from Gabelli Funds said in a latest program on Schwab Network that despite key challenges to search business and overlooked negative sentiment, he likes Alphabet (NASDAQ:GOOG).
“That’s a little bit more disliked right now in the investment community. I would defend Google here. Google’s trading at about 16 times next year’s GAAP earnings, and I know there’s structural questions about how search is going to fare in the era of generative AI. Is AI going to disrupt search? I mean, I would just say these types of questions about existential threats to Google search seem to come up every couple years, and Google just powers right through every time. I think what’s really interesting about Google is there’s a lot they can do to continue to drive efficiencies in their P&L and to take out costs and to improve margins. They have a new CFO who came from Eli Lilly. I think she seems very committed to driving cost efficiencies. And back to the valuation point, so long as Google can hit these nearer-term numbers, I think that’s sort of the catalyst to get this stock working again. So Google’s a name that has been beaten up, it’s lagged, there’s questions. I think it’s just too cheap for the type of quality.”
Alphabet’s search business is under threat from AI. However, its Gemini model has an edge over competitors because of the huge ecosystem Alphabet already has. For the end user, it’s easier to switch from traditional search to Gemini instead of moving to a completely new app like ChatGPT or Perplexity. So far AI competition hasn’t dented the company’s search revenue.
In the fourth quarter, Alphabet’s operating margin rose 32%. YouTube ad revenue jumped 14% and Cloud revenue skyrocketed by 30.1%. Google raked in $12.8 billion in FCF, marking a roughly 215% growth compared to the same period last year, despite heavy investments in AI. The stock has a forward (2026) P/E ratio of 20.8x, which makes it about 22% cheaper than the average company in its sector.
The market has been ignoring Alphabet Inc (NASDAQ:GOOGL)’s key secondary businesses and the stock remains undervalued despite concerns around AI search and regulatory onslaught.
Alphabet Inc (NASDAQ:GOOGL)’s secondary ventures in AI, autonomous driving, and other areas are making solid progress, especially in the Waymo robotaxi segment. Waymo has shown notable progress. Waymo vehicles now average about 30.6 autonomous rides per day—substantially higher than Uber’s average of 4.18 rides per driver daily, based on Uber’s 31 million daily trips and 7.4 million drivers last quarter. This performance underscores Waymo’s competitive edge in autonomous ride volume compared to traditional ride-hailing.
Burke Wealth Management stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its Q4 2024 investor letter:
Alphabet: We parted ways with long-term holding Alphabet during the fourth quarter. We’ve owned Alphabet since the inception of the Focused Growth strategy so obviously, the company has many positive attributes that we admire. That remains the case. We have long contended that Google search is the best business in the world. However, developments over the past couple of years on the competitive front (generative AI search) and the regulatory/legal front have put the sustainability of Google’s search monopoly at legitimate risk for the first time since Microsoft launched Bing in 2009. We cut our weighting in Google in half last year as we wanted to take some time to better assess the threat of generative AI driven search to its business model. To be fair, this emerging threat has been something more akin to a gathering storm than a tornado. Capital continues to flow into the space both from start-ups and the Microsoft/Open AI collaboration. Thus far, this has not resulted in a material erosion of market share but it is certainly something requiring continued monitoring….” (Click here to read the full text)
Overall, GOOG ranks 4th on our list of top stocks to watch as AI trade dynamics change. While we acknowledge the potential of GOOG, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GOOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.