Alphabet Is Poised to Shake Up the AI Race

Investors have long treated Alphabet (GOOGL) as the laggard in the AI race... and with good reason.

Alphabet's fragmented approach to developing AI technology has resulted in the tech giant rolling out innovations at a slower pace than its peers. And in many cases, its work has underwhelmed...

For instance, the company's Gemini AI chatbot drew criticism back in February for generating inaccurate images of historical figures.

This caused the market to sell out of Alphabet... and into its AI competitors like Nvidia (NVDA) and Microsoft (MSFT).

Alphabet's valuation fell by $80 billion that day, putting it well behind Nvidia – which had overtaken it earlier that month.

But Alphabet's management has rejuvenated its AI efforts. And as we'll explain, the results are starting to show...

In Alphabet's recent earnings report, operating income grew nearly 50%...

Revenue soared 28% for Google Cloud... the segment of the company that has the most AI technology. The company even announced its first quarterly dividend.

Clearly, management is confident that the reorganization of its AI efforts will drive future sales.

The stock recovered, too. It seems like CEO Sundar Pichai knows what the people want.

Google has spent most of the past decade trying to be more than a search engine. That's why the company restructured and renamed itself Alphabet almost nine years ago.

Alphabet became an innovation dynamo, with – as the name implied – a business for every letter of the alphabet. And the new focus did turbocharge innovation... but it also created a lot of corporate complexity.

As Alphabet added more and more business units, its structure became more fragmented structure... and less unified.

The company is so massive that some smaller units had no clue what was going on in other units.

Still, Alphabet's sustained innovative developments and brand name protected its status as a tech leader.

That changed when the AI race started to heat up. New leaders started to take over, and investors abandoned companies that were slow to roll out AI features.

And that was when the consequences of Alphabet's fragmented structure became clear. Without a sense of unity and aligned goals, Alphabet couldn't keep up with this AI rampage.

Last year, the company combined its two biggest AI units... DeepMind and Google Brain.

But that wasn't enough, since many of its AI efforts were still in their own units...

Then, this April, Pichai finally acknowledged his mistake and began unifying the company's AI efforts under Google DeepMind. He says it should make everything more efficient while benefiting both the Android and Chrome ecosystems.

Alphabet already saw great gains after earnings. It's still deep in the AI game. The company has a ton of AI research, and plenty of tools it can enhance with AI – like its search engine, Gmail, and ad platform.

We've been recommending this stock in our Hidden Alpha portfolio since May 2020. It's up a combined 126% since then.

And with its re-envisioned AI effort... we expect more success in the future.

Regards,

Joel Litman
May 9, 2024