Missed Nvidia’s Monster Earnings? Buy this AI stock instead

Nvidia (NASDAQ: NVDA) almost single-handedly drove the stock market to new highs this year. Well, that may be an exaggeration, but it sure feels like it. Investors have clamored to own Nvidia stock after realizing how critical the semiconductor supplier is to the infrastructure and growth of artificial intelligence (AI) solutions. The company provides leading computing solutions for AI and has enjoyed incredible pricing power with its customers.

But what if I told you that another tech giant not only has it own Nvidia-like subsidiary, but also the only company with the assets to vertically integrate whole AI supply chain?

Come in Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).

That’s right, the owner of Google Search has hardware, infrastructure, software and engineering talent built up over a decade that no one can match in AI technology today. What’s more, the stock is actually trading at a reasonable multiple of earnings, having fallen 20% from its all-time high in the past few weeks.

Here’s why you should buy Alphabet stock if you missed Nvidia’s monster earnings.

Alphabet: The only vertically integrated player in AI

Nvidia has made the graphics processing unit (GPU) a mandatory component in building AI systems, but GPUs have been around far longer than AI has been in the headlines. Inspired by these computer chips, Alphabet began investing in its own computer chip design 10 years ago. It came out with the first Tensor Processing Unit (TPU) in 2015. The purpose of TPUs is to optimize Alphabet’s massive computing costs arising from Google Search, YouTube and other consumer internet properties.

This computing hardware has now advanced rapidly. The sixth generation Trillium that was released this year has a 4.7 times increase in computing performance over the previous generation of TPU. That’s a lot of cost savings that Alphabet will be able to implement in all of its new AI products.

TPUs are like Alphabet’s in-house Nvidia operation, the backbone of its AI computing. However, it goes much further than just optimizing chip performance. Alphabet has the Google Cloud unit — powered by TPU, of course — that sells Alphabet’s AI capabilities to third parties. Google Cloud hit $10.3 billion in revenue last quarter and is growing 29% year over year. There is a long runway for this division as the demand for AI increases.

Of course, Alphabet also has a data advantage for training AI tools. Google search, YouTube and other Alphabet properties have billions of users worldwide that can be used to train AI models. The Alphabet dataset here is proprietary, which is why OpenAI (the organization behind ChatGPT) may run into legal trouble for scraping data from YouTube transcripts to train its own AI.

The story continues

Finally, Alphabet has the best AI talent in the world and has invested in AI researchers since acquiring research lab DeepMind in 2014. Some competitors may be able to match Alphabet’s capabilities in part of the AI ​​supply chain, such as Amazon with its cloud computing operation. However, there is no company with a combination of computing technology, cloud infrastructure, data hosting and human talent that can match Alphabet in AI. This is why Alphabet has a head start to win in AI this decade.

Lots of growth, but at what cost?

There is clearly an increase in demand for AI research and computing capacity. But how will that show up in Alphabet’s bottom line and generate more profits for the company? In a conference call this year, Alphabet CEO Sundar Pichai said there is a greater risk of underinvesting in AI than overinvesting and wasting money. Shareholders hate to waste money, though, which is why the market has been bearish for Alphabet stock recently.

Management plans to spend tens of billions of dollars on capital investment for new AI capabilities across its various Internet properties. To get an adequate return on that invested capital (ROIC), it will need to continue to grow revenue across its three main segments: Google Search, YouTube, and Google Cloud.

Last quarter, Google Search (which includes other Google properties) grew revenue by 14% to $48.5 billion. YouTube advertising grew 13% to $8.7 billion. Google Cloud, which we talked about above. So far, so good for Alphabet in the AI ​​era. However, investors will need to keep a close eye on earnings growth. If Alphabet spends all that money on AI infrastructure and revenue growth slows, profits will likely fall. That’s how income statement math works.

The stock looks like a bargain

After the recent stock reduction, Alphabet now trades at a price-to-earnings (P/E) ratio of just 23. This is much lower than other tech industry competitors such as Applewhich has a P/E of 33 while growing more slowly. The wider S&P 500 the index trades at a P/E close to 29.

If you’re a believer in Alphabet’s AI upside, the stock looks like a bargain right now. Revenue growth in its cloud, YouTube and Google Search segments should translate into strong earnings. Meanwhile, management continues to buy back shares and just announced a new dividend, which will boost returns for shareholders.

There’s a lot to like about Alphabet stock at current levels. If I wanted to bet on AI growth, this is the stock I’d buy right now.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. Brett Schafer has positions in Alphabet and Amazon. The Motley Fool has positions and recommends Alphabet, Amazon, Apple and Nvidia. The Motley Fool has a disclosure policy.

Missed Nvidia’s Monster Earnings? Buy This AI Stock Instead was originally published by The Motley Fool