The concept of artificial intelligence (AI) has existed for more than seven decades. The term was first coined in 1950 by Alan Turing, a renowned mathematician and scientist. However, in the last few years, technological advances have enabled companies to bring the AI concept to life.
OpenAI’s ChatGPT was launched in November 2022, and the popular generative AI platform has gained massive traction in the last 21 months. Wall Street was soon excited by the AI megatrend fueling company valuations higher. Since the start of 2023, the tech-heavy Nasdaq Composite index has surged close to 70% despite macroeconomic concerns and geopolitical tensions.
The AI megatrend has just begun, and the disruptive sector is expected to expand rapidly over the next decade. Given these factors, let’s see why Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) is my top AI stock to buy right now.
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Google’s AI push
Valued at more than US$2 trillion by market cap, Alphabet is the parent company of Google, the largest search engine in the world. Google has used AI for its search engine for over two decades to provide relevant results and updates to internet users.
With an already engaged user base across platforms such as YouTube, Gmail, and Google Cloud, Alphabet is well-positioned to benefit from network effects and gain traction in the AI space.
Alphabet is expected to invest nearly US$50 billion in capital expenditures this year, most of which could be deployed to enhance its AI capabilities and optimize the Gemini platform.
A strong performance in Q2 of 2024
Alphabet reported revenue of US$84.74 billion and adjusted earnings per share of US$1.89 in the second quarter (Q2), compared to consensus estimates of US$84.19 billion and US$1.84, respectively. Despite its massive size, Alphabet increased its revenue by 14% year over year as its cloud business surpassed US$10 billion in quarterly sales and US$1 billion in operating profit for the first time ever.
Moreover, its ad revenue grew to US$64.6 billion in Q2, up from US$58.14 billion in the year-ago period. Alphabet also owns YouTube, the largest video platform in the world, and this business grew sales to US$8.66 billion, up from US$7.66 billion last year.
The company’s “Other Bets” segment earned US$365 million in the June quarter, up from US$285 million in the same period in 2023. This business includes Waymo, Alphabet’s self-driving car company, which will attract a multiyear investment totalling US$5 billion.
Is GOOGL stock undervalued?
Analysts tracking GOOGL stock expect adjusted earnings per share to expand from US$5.8 in 2023 to US$8.69 in 2024. This means that Alphabet is priced at 19 times forward earnings, which is reasonable given its growth estimates. Analysts remain bullish on the tech stock and expect it to surge over 20% in the next 12 months.
In addition to capital gains, Alphabet offers you the opportunity to benefit from a growing dividend payout. It pays shareholders an annual dividend of US$0.80 per share, which indicates a forward yield of just 0.5%. However, the company’s free cash flow per share in the last 12 months totalled US$4.88, indicating a payout ratio of less than 20%.
