Alphabet Looks Like an AI Underdog, but Here's Why Its Stock Could Be Worth Buying Now

Alphabet Inc. (GOOGL, GOOG), the parent company of Google, has been facing some headwinds in the artificial intelligence (AI) race. The release of OpenAI's GPT-4o in 2023 and the company's recent commitment to invest heavily in capital expenditures (capex) have raised concerns among investors. However, Alphabet's long-term focus on AI and its vast resources position it well to remain competitive in this rapidly evolving field. Here's why Alphabet's stock could be worth buying now.

Alphabet's AI Strategy and Competitive Advantages
Alphabet has been investing in AI since 2001, when it first applied AI to its search engine. This long-term commitment has allowed the company to build a strong foundation in AI and stay ahead of the curve. Alphabet's AI strategy encompasses a full-stack approach, including infrastructure, software, applications, and ads. This holistic approach enables the company to integrate AI across its ecosystem, enhancing user engagement and boosting advertising conversion rates.

Alphabet is leveraging AI in its core advertising business, improving operating and financial performance. The company's AI-powered capabilities are integrated across its ecosystem, enhancing user engagement and boosting advertising conversion rates. In addition, Alphabet's Google Cloud division has seen exceptional demand for its suite of AI and machine learning tools, leading to a diversification beyond advertising revenue and a shift in higher operating margins.

Alphabet's AI investments have also led to significant breakthroughs in other areas, such as video AI and quantum computing. The company's Veo 2 AI video generator has received rave reviews and is widely considered to outperform OpenAI's Sora video generator. Additionally, Alphabet has made recent breakthroughs in quantum computing, demonstrating its innovative prowess in the face of competition.

Alphabet's Capex Investment and Long-term Impact
Alphabet has announced that it will invest $75 billion in capex in 2025, up from $53 billion in 2024 and $32 billion in 2023. This investment is primarily related to AI and is expected to have a positive impact on the company's financial performance and stock valuation in the long term. The investment in capex will likely deliver returns that increase the company's free cash flows over time, as Alphabet generated nearly $73 billion in free cash flow in 2024.

Alphabet's low valuation relative to its peers makes it an attractive investment opportunity. The company's P/E ratio of 23 is the lowest among the "Magnificent Seven" stocks, and its discounted price could work in its favor if investors see an obvious, AI-driven catalyst. Alphabet's strong financial performance and growth prospects, combined with its attractive valuation, make it a compelling long-term investment.

Risks and Challenges in the AI Sector
While Alphabet faces several potential risks and challenges in the AI sector, its significant resources, long-term focus on AI, and commitment to investing in the field position it well to remain competitive. Some of the risks and challenges Alphabet faces in the AI sector include increased competition, regulatory pressure, technological uncertainty, ethical and reputational risks, and talent acquisition and retention.

To mitigate these risks, Alphabet should stay informed about regulatory developments, maintain a diverse portfolio of AI investments, prioritize ethical considerations in its AI development and implementation processes, foster a culture of innovation, and offer competitive compensation packages to attract and retain top talent.

Alphabet's AI Strategy and Competitive Advantages
Alphabet's AI strategy is distinct from its competitors, such as OpenAI and Microsoft, in several ways. The company's long-term focus on AI, full-stack approach to AI, AI in its core advertising business, AI in Google Cloud, AI in search and YouTube, AI in video and image generation, and AI in quantum computing give Alphabet a unique advantage in the AI landscape.

Alphabet's Capex Investment and Long-term Impact
Alphabet's significant investment in capex is expected to have a positive impact on its financial performance and stock valuation in the long term. The company's focus on AI, strong financial performance, and attractive valuation make it a compelling investment opportunity for long-term investors.

Risks and Challenges in the AI Sector
While Alphabet faces several potential risks and challenges in the AI sector, its significant resources, long-term focus on AI, and commitment to investing in the field position it well to remain competitive. By staying informed about regulatory developments, maintaining a diverse portfolio of AI investments, prioritizing ethical considerations, fostering a culture of innovation, and offering competitive compensation packages, Alphabet can mitigate these risks and continue to thrive in the AI sector.

In conclusion, Alphabet's AI strategy, competitive advantages, capex investment, and long-term impact position the company well to remain competitive in the AI sector. While the company faces several potential risks and challenges, its significant resources, long-term focus on AI, and commitment to investing in the field make it a compelling investment opportunity for long-term investors.