Alphabet's Energy Consumption Paper Supports Cost Advantage Thesis, Maintains $237 Fair Value Estimate

A technical paper by Google researchers found that the energy consumption of a median Gemini text prompt is 0.24 watt-hours, lower than many estimates. This supports Alphabet's cost advantage in deploying AI, which we believe will let it deploy AI across its businesses. The paper throws doubts on the "rising costs will destroy margins" argument and encourages us to maintain our $237 fair value estimate for Alphabet. Despite shares being up 40% from their April lows, we view them as undervalued.

Google's recent technical paper has shed new light on the energy consumption of its Gemini AI model, revealing that a median text prompt uses 0.24 watt-hours (Wh) of energy. This finding is significantly lower than many previous estimates, highlighting Google's cost advantage in deploying AI across its businesses. The paper also suggests that the "rising costs will destroy margins" argument may be unfounded, supporting Alphabet Inc.'s (Google's parent company) cost structure and encouraging a fair value estimate of $237 for the company.

The paper underscores Google's commitment to transparency and efficiency, setting a new standard for measuring the environmental impact of AI models. It finds that AI-specific hardware (Google's TPUs) accounts for only 58% of the total electricity demand, with the remainder attributed to supporting equipment, idle machines, and data center overhead [1]. This comprehensive approach helps to understand the true environmental footprint of AI, which is crucial for ongoing monitoring and improvement.

Despite the positive impact on Alphabet's stock, shares are currently up 40% from their April lows. However, investors may view them as undervalued, given the company's strong position in AI and its commitment to sustainability. The paper's findings also support Alphabet's strategy of deploying AI across its businesses, potentially driving growth and improving margins.

In conclusion, Google's Gemini AI model represents a significant advancement in energy efficiency, setting a new benchmark for the AI industry. The company's commitment to transparency and sustainability is likely to continue driving innovation and growth, making Alphabet Inc. an attractive investment opportunity.

References:
[1] https://www.ainvest.com/news/apple-talks-google-enhance-siri-gemini-ai-technology-2508/
[2] https://theoutpost.ai/news-story/google-unveils-groundbreaking-data-on-ai-energy-consumption-19372/
[3] https://www.cbsnews.com/news/ai-environment-impact-study-energy-usage-google-gemini-prompt/