OpenAI Exodus: 1 stock set to benefit

The OpenAI saga reads more like a novel than typical business history. The company has hired and fired its founder, gone through many executives, and is now making a dramatic shift to a for-profit company. More than a dozen key employees have left the company this year, including its chief technology officer (CTO) since late September.

Even though the company has raised billions in capital to finance its artificial intelligence (AI) spending, the terrain looks distinctly shaky at the start-up. If the exodus ends up hurting OpenAI, there is one competitor that could benefit: Alphabet (GOOG -2.47%) (GOOGL -2.44%).

Does this make Alphabet stock a buy in October 2024?

Limiting market share losses

OpenAI is the owner of ChatGPT, the conversational and realistic chatbot that started the AI ​​craze about two years ago. ChatGPT has begun to replace search engines in certain contexts, and OpenAI has partnered Microsoft to power its Bing search engine, which made a dent in Google’s search engine dominance.

On desktop computers — where Microsoft owns the most important Windows operating system — estimates show Google’s market share falling below 80 percent, down from nearly 90 percent a few years ago. Most of those share losses came from Microsoft Bing following its partnership with OpenAI. On mobile devices, Google has almost 100% market share thanks to its ownership of the Android operating system and the large licensing deals it makes. Apple.

Any problems for OpenAI due to the loss of key employees could be an opening for Google to recoup some of its market share losses. Alphabet’s AI research labs have managed to come out with competing products for everything OpenAI has released. It recently rehired a major industry thought leader, and founder Sergey Brin is back at the company and working on new AI tools every day.

OpenAI is losing key employees, while Alphabet is doing everything it can to retain its best talent. That could give Alphabet an edge over OpenAI in the coming years.

Win through vertical integration

The advantages don’t stop there. Through several years of investment, Alphabet is now the only company that can come close to vertically integrating the AI ​​supply chain. It has top researchers working with some of the most extensive data available, thanks to Google Search, YouTube and Gmail. In addition, it has even invested in its own computer chips called Tensor Processing Units (TPU) for years.

One of the bottlenecks in building AI tools is computing power, and Alphabet is clearly in the lead when it comes to building its own chips. Only now are there people like Meta platforms and Microsoft is trying to catch up.

Tying it all together is Google Cloud, Alphabet’s cloud computing subsidiary, which powers its internal services and third-party products. Underlying this cloud infrastructure are the TPUs and AI software that Alphabet has been building over the past decade, which it can now sell to other companies. Google Cloud revenue was over $10 billion last quarter.

Part of the reason Google Cloud has been so successful is its vertical integration with Alphabet’s business. This advantage will only increase in the coming years as the use of AI grows and grows.

Data by YCharts.

Search and Cloud can drive the stock forward

AI has been the talk of the town for a few years, but how does it lead to better business outcomes (ie profits)? OpenAI is reportedly losing $5 billion this year from just $3.7 billion in revenue, which doesn’t seem like a sustainable business model.

Meanwhile, Alphabet has clear ways to generate profits from AI. First, it has started placing ads below AI search results on Google, which will help Google Search revenue continue to grow. In the last quarter alone, Alphabet’s Google search segment generated nearly $50 billion in revenue and the majority of consolidated operating income.

Second is the aforementioned Google Cloud subsidiary. The cloud computing giant is finally turning a profit (over $1 billion last quarter) and has a long runway for reinvestment. Revenue should continue to grow at a double-digit rate, and profit margins should continue to increase.

Add both ingredients together and you have a simple recipe for Alphabet to generate revenue growth from its new AI tools. Alphabet shareholders should keep a close eye on Google Search and Google Cloud, as they will likely fuel the business for the next decade or more.