As the excitement surrounding artificial intelligence (AI) continues to grow, investor enthusiasm for this field seems to have reached new heights. However, there are still doubts about whether the fervor for AI stocks is being overhyped. Take Nvidia as an example; its stock price skyrocketed tenfold in just a few years, but such a high valuation could lead to market corrections in the future.
Nevertheless, the generative AI market is still in the early stages of rapid growth. Some analysts predict that by 2030, spending on generative AI will reach $356 billion, with an annual growth rate of up to 46%. In contrast, spending this year is expected to be only $36 billion. Since Nvidia's valuation already reflects this growth, investors may want to focus on other potential beneficiaries.
Among many tech companies, Alphabet, the parent company of Google (NASDAQ: GOOGL), stands out. Since the launch of ChatGPT by OpenAI at the end of 2022, investors in Alphabet have expressed concerns about its future, causing its stock price to drop to a ten-year low price-to-earnings (P/E) ratio of around 15. However, in the past two years, Alphabet's stock price has rebounded, achieving a cumulative return of 90%.
Through its various subsidiaries and research labs, Alphabet has successfully launched several new AI products, including the NotebookLM document summarization tool, Google Search AI summary feature, and Google Lens, which allows users to search by taking photos. These innovations demonstrate that Alphabet is making progress not only in the generative AI field but also achieving significant results in other technologies, such as autonomous driving. Its subsidiary, Waymo, has expanded operations in multiple cities across the U.S., completing 100,000 rides per week, with a tenfold annual growth rate.
In terms of profitability, Alphabet is relying on its cloud computing business, Google Cloud, to generate profits. Google Cloud leverages Alphabet's AI technology, computing chips, and data centers to sell related tools to third-party customers. In the most recent quarter, Google Cloud's revenue grew by 35% year-over-year, reaching $11.4 billion. It is expected that in the coming years, this business will achieve annual revenues of $100 billion, with a profit margin of 25%, contributing $25 billion in operating income to the parent company.
Despite Alphabet's strong performance in the AI sector, its stock valuation remains lower than many peers, with a current P/E ratio of 23, compared to Nvidia's P/E of 66 and Apple's P/E of 37. Given that generative AI revenues are expected to grow rapidly over the next decade, Alphabet will undoubtedly hold a significant position in this market, providing investors with a good buying opportunity at relatively low valuations.
Key Points:
💡 Spending on the generative AI market is expected to reach $356 billion by 2030, with an average annual growth of 46%.
🚀 Alphabet is becoming a winner in the generative AI field through multiple AI products and its cloud computing business.
📉 Despite its strong performance, Alphabet's P/E ratio is still lower than many peers, offering a good buying opportunity for investors.