Artificial intelligence (AI) has gotten so much hype for the past two years that it's fair to question whether it's gone too far. Perhaps the market has reached this point; large technology companies and high-flying AI stocks have started selling off over the past few weeks.
Tech giant Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) stock price has dropped 13% from its recent high, and now ChatGPT developer OpenAI is challenging Alphabet's ultra-important Google Search business.
Alphabet recently announced second-quarter earnings results, allowing investors to take the company's pulse and sniff out potential concerns. Alphabet's earnings convinced me it remains a top AI stock you can confidently buy today. Here is what you need to know.
Alphabet's effort to lead in AI hasn't detracted from its fortress-like balance sheet
Alphabet's Q2 revenue grew 14% year over year, and earnings per share (EPS) were up 31.2%. Alphabet built its company on Google Search, which still represents over half of total revenue and continues to drive Alphabet's growth. Search revenue (not including YouTube) was $48.5 billion in Q2, up almost 14% from last year.
Search has become a somewhat unsung hero because it's been around since the start, and newer businesses like cloud get a lot of attention. Remarkably, Google Search could still have a lot of growth ahead. Over a third of the global population still lacks internet access, and Google's global dominance (over 90% worldwide market share) essentially guarantees growth as more people connect to the web.
Don't get me wrong; Alphabet's other businesses are all doing great; YouTube ad revenue was up 13%. Google Cloud grew revenue by nearly 30%, and its operating profits almost tripled as it became increasingly profitable.
Despite massive spending on AI hardware and software development, the company has maintained an enormous cash hoard of $100 billion (against just $13 billion in debt). Management even acknowledged its high spending on the earnings call, cautioning it would rather overspend than get caught flat-footed by competition.
Why investors shouldn't fear OpenAI's search ambitions
Alphabet stock dropped after AI developer OpenAI announced it was testing an AI-powered search engine called SearchGPT. OpenAI's flagship product, ChatGPT, is a large language model that burst onto the scene as the fastest-growing app in history and lit the powder keg of AI hype on Wall Street. Naturally, a perceived threat to Google, Alphabet's golden goose, is a negative.
But investors should pump the brakes because Alphabet has been through this already. Remember, OpenAI partnered with Microsoft to install ChatGPT features into Microsoft's Bing search engine early last year. The monthly market share data indicated that it had virtually no impact on Google.
And Alphabet didn't just sit on its hands, either. The company has woven numerous AI features into Google Search and its other products. So, what will OpenAI offer that Google Search can't? OpenAI has stated its product will deliver more concise results. Time will tell if SearchGPT can successfully gain market share. Don't underestimate Google's brand power -- it routinely ranks among the world's most familiar and known brands.
SearchGPT has a lot of work to do before it establishes itself as a legitimate threat to Alphabet.
Why the stock is a buy today
Continued success in Google Search and Cloud revenue gives analysts a straight-line view of the business. Consensus estimates call for long-term earnings growth averaging 17% annually. Assuming Alphabet delivers, the stock's forward P/E under 22 seems like a great buying opportunity.
I generally buy stocks with a PEG ratio of less than 1.5, and Alphabet's is 1.25 today. The PEG ratio compares a stock's valuation to the company's expected earnings growth. It's signaling that Alphabet is a good value for the growth you might get.
The numbers look good on their own; the investment seems more compelling when considering Alphabet's dominant core business, excellent balance sheet, and widespread efforts to lead in AI technology. How much AI could help the company grow over the next five to 10 years is still unclear.
There is more than enough going on in Alphabet to justify buying and holding the stock today.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
1 Top Artificial Intelligence (AI) Stock to Buy Right Now was originally published by The Motley Fool