The S&P 500 keeps soaring to new highs, making it feel impossible to find a cheap large-cap stock to buy today. This is especially true in technology and artificial intelligence (AI). Stocks such as Nvidia and Microsoft have price-to-earnings (P/E) ratios approaching 40 or higher, making them risky for investors. Growth expectations are high for many companies, which can make it increasingly difficult to buy stocks for your investment portfolio, especially if you care about value investing.
That isn’t the case with every AI stock. Here’s why Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is the one AI stock you can buy right now with stocks at all-time highs.
Some pundits have deemed Alphabet — parent company of Google — an AI loser because of competition from ChatGPT. I think this underplays the big picture. Alphabet has perhaps the most to gain from AI through its various subsidiaries, while also employing the best data advantage of any big technology player because of all the user data from Google, YouTube, and other properties.
AI is not going to eliminate Google Search — it will take it to the next level. AI overviews are already growing like a weed for Google Search results, while the Gemini chatbot is helping with advanced conversational queries. An explosion in new AI technologies will greatly expand the addressable market for Google and its related properties. That’s why revenue is growing at a 10% annual rate for Google Services, even though it generated $77 billion in revenue just in the first quarter.
Another way Alphabet can benefit from AI demand is Google Cloud, which is growing revenue at an astonishing 28% year-over-year clip, and is close to surpassing $50 billion in annualized revenue (it may surpass that mark next quarter). AI workloads will need huge amounts of specialized computing power to function, which Google Cloud is set to provide.
Let’s not forget self-driving start-up Waymo, which is taking over the streets of America’s big cities, using Alphabet’s infrastructure, engineering, and AI expertise.
It is an entire matrix of growth for Alphabet that can be supercharged by AI.
AI requires a lot of upfront spending on data centers and computer chips in order to train and operate. Alphabet is planning to spend $75 billion on capital expenditures in 2025, mostly related to AI. This will increase depreciation and require steady growth in order to get a return on this investment, which some investors are skeptical about. Google Cloud used to be unprofitable, but it posted an 18% operating margin last quarter, a number that can keep expanding as it reaches larger scale.
