Investors have piled into artificial intelligence (AI) stocks in recent times on optimism about the technology’s game-changing potential. The idea is that AI could help companies become more efficient, generate cost savings, and even make great discoveries. And this may supercharge their earnings down the road.
But some companies already are seeing the benefits of AI, and these are the players offering products and services to those developing AI platforms. One of these tech giants just reached a huge milestone, thanks, in part, to its investment in AI and offering these tools to its customers. I’m talking about Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), most known for its Google search platform and Google cloud services.
Is it time to buy this AI stock?
Image source: Getty Images.
First, a little background on Alphabet and its businesses. The company makes the lion’s share of its revenue thanks to advertising on Google search, which holds more than 91% of the worldwide search market. Customers buy advertising that appears on Google pages to reach their target audiences. In the most recent quarter, Google’s advertising revenue totaled $64.6 billion of the company’s total revenue of $84.7 billion.
Though advertising is the company’s biggest moneymaker, Alphabet also is gaining significant ground in another area — cloud computing services. This includes everything from cloud storage to platforms for companies developing AI programs. And this brings me to the subject of Alphabet’s big milestone. In Alphabet’s earnings report for the first time ever, Google cloud reached more than $10 billion in quarterly revenue and more than $1 billion in quarterly operating profit.
Alphabet’s cloud business still is far from catching up to market-leader Amazon‘s Amazon Web Services (AWS). This bigger rival reported $25 billion in revenue and $9.4 billion in operating profit in the most recent quarter. But Google cloud is growing faster, with 28% growth in revenue and 197% growth in operating profit in the quarter year over year. That’s compared to 17% and 84% respective growth for AWS.
Importantly, Alphabet’s AI infrastructure and generative AI solutions segments have brought in billions of dollars in sales, signaling that the company’s AI investments are starting to bear fruit. And more than 1.5 million developers are using Google’s large language model Gemini. On top of this, most of Google cloud’s 100 biggest customers are using generative AI solutions.
It’s not yet clear when Alphabet will fully monetize its AI investments — this will be a long-term story rather than a short-term one, as with any new investment in a major technology. But it’s positive to see the efforts beginning to drive revenue growth and even help the cloud business reach a key milestone. Though cloud is a much smaller part of the revenue picture than Google advertising, it’s a significant growth driver — and this could continue as the AI opportunity expands.
Is it time to buy this AI stock? A look at Alphabet’s valuation shows it’s trading for about 23x forward earnings estimates, up from this year’s low of less than 20 just a few months ago. But the stock still remains cheap, considering the strength of the Google search business, as well as the recent progress made by Google cloud.
Alphabet’s focus on AI is a major positive and should drive growth in the years to come. Though it will take time for the company to fully monetize its investments, its return on invested capital has generally increased over the past five years.
GOOG Return on Invested Capital data by YCharts.
All of this means right now is a great time to invest in Alphabet shares. You’ll be picking them up at a very reasonable price — and buying them during an early chapter of the AI growth story. By holding your shares over time, your portfolio could benefit as both AI development and Google cloud continue to become a more important part of the Alphabet revenue picture.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
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