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Is Alphabet (GOOG) The Best Undervalued AI Stock Right Now?

We recently published a list of top 10 AI stocks Wall Street analysts are upgrading. Alphabet Inc Class C (NASDAQ:GOOG) ranks 4th in the list. That’s why the stock deserves a deeper look.

There has been much uproar about AI stock valuations and how investors are overpaying for mega-cap tech stocks that are promising something that still lies far into the future — productivity gains, real-life AI products and AGI. But the market doesn’t seem to care what the AI skeptics and naysayers believe. There seems to be no end in sight to the AI-led gains in stocks. And analysts are expecting more. Goldman Sachs’s Scott Rubner recently said that he sees a “wall of money” heading towards the market. Rubner pointed towards the whopping $7.3 trillion sitting in money market funds and said he believes the floodgates are about to open and investors would funnel that money into stocks. According to Rubner’s model, the third quarter of 2024 is when we should expect billions ($29 billion, to be precise) to be flushed into the market.

One doesn’t need to have a crystal ball to know where all of those billions would be headed. AI is the promising theme everyone is betting on and that everyone includes experts, billionaires, money managers and long-term value investors. Tom Lee, Fundstrat Global Advisors co-founder, recently said in a program on CNBC that investors have been “hesitant” for much of the year, but they should just “stick” with “what’s working.” AI, weight loss drugs and related themes is what’s working these days, according to Lee.

Image by MayoFi from Pixabay

Methodology

For this article we picked the top AI stocks Wall Street analysts recently upgraded or gave bullish comments about. With each stock we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Alphabet Inc Class C (NASDAQ:GOOG)

Number of Hedge Fund Investors: 165

Alphabet Inc Class C (NASDAQ:GOOG) is apparently in a no-holds-barred fight against competitors in the AI race that according to many threatened the bread and butter of Alphabet Inc Class C (NASDAQ:GOOG): its search business. However, many analysts believe Alphabet Inc Class C (NASDAQ:GOOG) is making a big turn and will continue to grow. Alex Kantrowitz, Big Technology founder, while talking to CNBC last month, said that the present for Alphabet Inc Class C (NASDAQ:GOOG) is looking “real good” amid revenue growth, leadership’s harsh stance against those “making trouble” inside Alphabet Inc Class C (NASDAQ:GOOG), dividends and buybacks.

Latest data analyzed by Bank of America shows that across all devices, Google’s market search in search actually gained half a percentage point in May on a MoM basis. BofA analyst Justin Post said this shows Alphabet Inc Class C’s (NASDAQ:GOOG) AI Overviews are “aiding query growth and usage.”

Alphabet Inc Class C (NASDAQ:GOOG) bulls believe Alphabet Inc Class C (NASDAQ:GOOG) is just getting started with AI product launches. Alphabet Inc Class C (NASDAQ:GOOG) is indeed in a strong position to develop an AI ecosystem around its products. For example, demos have shown that Gemini app will help people perform daily personal tasks like note taking, appointments, writing, etc. These features could easily be integrated with other Alphabet Inc Class C (NASDAQ:GOOG) apps. Alphabet Inc Class C’s (NASDAQ:GOOG) goal is to urge users to sign up for ‘Google One AI Premium’ plan, which has a $19.99 price tag. Analysts also believe Alphabet Inc Class C (NASDAQ:GOOG) is in a strong position to offset any headwinds or lost market share in Google search with YouTube, which saw its ads revenue reach $8.1 billion in the first quarter, a 21% growth. Alphabet Inc Class C’s (NASDAQ:GOOG) net income in the period came in at $23.66 billion, up 57%, or $1.89 per share.

Alphabet Inc Class C (NASDAQ:GOOG) bulls believe the market is not incorporating Alphabet Inc Class C’s (NASDAQ:GOOG) growth in Cloud, Other Bets, Video and other high growth initiatives. The stock is trading 20x Alphabet’s 2025 EPS estimate of $8.57. This multiple makes the stock look attractively valued since the Wall Street expects Alphabet Inc Class C (NASDAQ:GOOG) earnings to grow by 13.40% in 2025 and by 19% over the next five years on a per annum basis.

Lakehouse Global Growth Fund stated the following regarding Alphabet Inc. (NASDAQ:GOOG) in its April 2024 investor letter:

“Alphabet Inc. (NASDAQ:GOOG) delivered a strong quarterly result that came in well ahead of analysts’ expectations. Revenue grew 15.4% (16.0% constant currency) to $80.5 billion and operating income grew 46.0% to $25.5 billion. Revenue growth accelerated across Search, YouTube Ads, and Google Cloud, all whilst the company delivered its highest operating margin since 2021 – showing meaningful progress in the company’s efforts to durably re-work their cost structure. On the Generative AI front, management emphasised the company’s infrastructure advantages including 5th generation TPUs(chips developed by Google specifically for AI training and inference), high performance data centre architecture, and AI models that are 100x more efficient versus 18 months ago. Overall, we believe that Alphabet is well placed for the AI opportunity ahead and still has significant latent earnings power. When combined with a relatively undemanding valuation of 21x forward net profit and over $100 billion of cash on the balance sheet, it’s not hard to see why we remain positive on the range of outcomes in the years ahead.”

Overall, Alphabet Inc Class C (NASDAQ:GOOG) ranks 4th in Insider Monkey’s list of Analysts are Upgrading These 10 AI Stocks. You can visit Analysts are Upgrading These 10 AI Stocks to see the other AI stocks that are on analysts’ radar. While we acknowledge the potential of GOOG, our conviction lies in the belief that smaller, under-the-radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. 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.

READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.

Disclosure: None. This article is originally published at Insider Monkey.

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