'After being sold off in the second quarter, is AI investment actually a buying opportunity for Google?'
In the past few weeks, Alphabet, Inc. (also known as Google) (NASDAQ stock codes: GOOG, GOOGL) has experienced a strong rebound, catching up with some of its AI peers.
Despite the company's profits and revenue exceeding expectations, this wave of growth has stagnated and the stock price has fallen consecutively, but it has since rebounded somewhat.
Investors are concerned about the high cost of AI and the competition Google faces from Open AI, supported by Microsoft (MSFT).
However, considering Alphabet's wide moat, along with its profit potential and revenue prospects, I still believe the stock looks attractive and the current price is worth buying.
Google's AI comeback
A few months ago, the controversy surrounding Gemini was a good buying opportunity, and the stock has since risen over 24%, far exceeding the S&P 500 index and the Nasdaq index. The recent situation is still a good entry point.
In fact, Alphabet has been catching up with its AI peers and has outperformed the Nasdaq 100 index (NDX). However, after the earnings announcement, the stock fell significantly and only recently began to recover. Let's take a look at the reasons.
Alphabet's second-quarter earnings: High costs of artificial intelligence.
The actual performance of this quarter was not ideal.
Revenue increased by 15% year-on-year, and the operating margin increased to 32%.
The company's Google search and cloud revenues exceeded expectations, which is a positive highlight. However, the growth of YouTube advertising was slightly lower than expected.
Nevertheless, overall growth remains strong, with Google services growing by 11.5% year-on-year and cloud computing growing by 30% year-on-year.
So, what's the problem? This sell-off may be related to management's guidance for the next quarter, especially guidance related to operating margins.
However, the operating margin for the third quarter will reflect the impact of increased depreciation and expenses associated with our increased investment in technology infrastructure, as well as increased revenue costs due to the early release of hardware in the third quarter.
All of these investments in artificial intelligence have had an impact on profits. In the end, is it really worth it?
This seems to be a hot topic today, especially after this technology sell-off.
Artificial Intelligence: Costs and Benefits
Goldman Sachs questions the potential cost-benefit analysis of artificial intelligence in a recent report.
Over the next few years, investments in artificial intelligence are expected to exceed $1 trillion. But what results do companies need to show to prove this?
In an interview with Goldman Sachs about his book, "Why Nations Fail: The Origins of Power, Prosperity, and Poverty," MIT Professor Daron Acemoglu expressed his belief that expectations for artificial intelligence may indeed be exaggerated.
Acemoglu estimates that within the next 10 years, only a quarter of artificial intelligence tasks will be automated, which means that artificial intelligence will affect less than 5% of all tasks.
Less than 5% of all tasks doesn't sound like much, and the cost of $1 trillion seems too high.
Asimoglu also questioned whether the adoption of artificial intelligence will create new tasks and products, calling these impacts "not natural laws." He estimated that the impact on total factor productivity in the next ten years should not exceed 0.66%, and if the complexity of difficult-to-learn tasks is taken into account, it may even be less than 0.53%. This figure roughly equates to a 0.9% impact on GDP over the next decade.
Just as is often the case with revolutionary technologies, we may need more time than imagined to truly enjoy its benefits.
So, will artificial intelligence really completely change the world? Or is this just another example of investor overenthusiasm?
In any case, Google seems to be an obvious choice to consider for investment.
Google will excel in any case.
When the whole "artificial intelligence craze" began, Google was actually considered one of the potential losers.
Google's search revenue was suddenly threatened by ChatGPT, and now the company has started testing SearchGPT, making the situation even more severe.
Nevertheless, Google still dominates the search field, with revenue growth approaching 10% in this area.
But if ai really doesn't have such a big impact, relatively speaking, google is in a favorable position compared to some other technology companies that rely more on ai.
This may benefit google's largest source of income - search revenue.
YouTube has always been one of the fastest-growing niche markets and will continue to perform well. E&M is expected to grow at a compound annual growth rate of 3.5%, but YouTube may exceed this level as it replaces traditional media.
Finally, even without ai, Google Cloud will continue to perform well.
Google still holds a favorable position in the market and can maintain growth. Although if the ai bubble bursts, direct demand may decrease, but cloud computing will still perform well overall.
Ultimately, due to google's diversified sources of income, it will not be affected by the ai wave.
It is understandable that google is also pursuing ai, and it cannot afford not to do so at this time. As I mentioned earlier, the company has actually achieved some outstanding results in its TPU, and has just released the 6th edition.
In addition, if anyone has the ability to invest in ai, it is companies like google, with over 100 billion dollars in cash and enough market cap to easily acquire and absorb promising new startups.
Google is getting cheaper again.
After the recent sell-off, Google's valuation has returned to a very attractive level.
Its PEG is less than 1, with a non-GAAP FWD PEG of 1.23, which is quite low. Yes, companies like Meta Platforms (META) and Nvidia (NVDA) have lower expected PEG, but their growth expectations are much higher due to AI narratives.
But Google's situation is different. It is expected to achieve a revenue compound annual growth rate of around 11% over the next three years. Therefore, even if the AI bubble bursts, Google's forecasts will not be greatly affected.
Conclusion
I believe that, no matter what happens, Google will perform well. The company has a certain influence in AI growth and is investing in this technology, so its performance will be good as AI becomes more prevalent. However, even if this situation doesn't unfold as quickly as expected, Google also has a large amount of non-AI revenue, which will continue to grow.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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103492747 : Thanks you